Five Questions about Reputational Risk – Special Interview with Brian Sheley, Managing Director, Cascade Asia Advisors, Jakarta, Indonesia – July 7, 2014

On the first Monday of each month Emerging Markets ESG publishes a special interview with an academic, expert or practitioner about a specific topic with relevance to environmental, social and/or governance (ESG) issues.

This month’s interview, the 18th in the special interview series, is about reputational risk and is with Brian Sheley, Managing Director, Cascade Asia Advisors, Jakarta, Indonesia.

Cascade Asia Advisors is a boutique advisory firm focused on Southeast Asia. It exists to help level the playing field for foreign multinationals operating in challenging and opaque markets in the region. It takes a fiercely localized approach to executing market entry and expansion in Southeast Asia. Combined with its suite of proprietary market intelligence and risk management services, it helps clients modify their business planning with localized relevance and transform uncertain environments into navigable terrain. Its clients face challenges with greater clarity and confidence.

Brian Sheley is managing director and founder of Cascade Asia Advisors. He has covered Southeast Asia for nearly 20 years.  Prior to founding Cascade Asia, Brian worked for APCO Worldwide in Southeast Asia where he advised senior executives on strategy planning and execution, including blue chip corporations and foreign national governments. He was the client-facing lead of the international public affairs team servicing the ministries of foreign affairs, energy, tourism and health, under the direction of the Office of the Prime Minister of Malaysia, APCO’s largest client at the time. Before moving to Kuala Lumpur, Brian was a Senior Consultant in APCO’s Jakarta office where he managed an account that was cited in APCO Worldwide’s winning distinction as the Southeast Asia Consultancy of the Year (2010).  Brian earned a BA from Brigham Young University and a MA in International Economics and Southeast Asia Studies from the Johns Hopkins University School of Advanced International Studies (SAIS).

Emerging Markets ESG:  How would you define reputational risk?

BrianSheleyBrian Sheley: There is no real consensus about how to define reputational risk. Is it a stand-alone risk within the existing portfolio of risks—strategic, financial, political, operational, compliance, environmental, etc.—or is it merely a consequence of poorly managing these risks? I see reputational risk as a category unto itself. From my vantage point, it includes standard business risks, most of which can be quantified, or, an established mechanism exists to manage them. It also transcends these risks though, to include daily, intangible risks that are driven by behaviors and relationships which are ever-evolving. Which risk accounts for the quality of the working relationship of your senior executives with their stakeholders? How does the effectiveness of your public affairs team figure into your risk profile? Do you have a measurement of each individual employee’s aptitude to negatively portray your company? Have you sufficiently gauged the impact of specific decisions that may impact your internal and external stakeholders?

If a company’s reputation is what is perceived and believed by its stakeholders, reputational risks are anything that threaten that expectation. That can be an overwhelmingly wide pool of interconnected parties.

Emerging Markets ESG:  Which issues are most prevalent as sources of reputational risk in Southeast Asia?

Brian Sheley: A company’s reputation is dependent upon the perceptions of its stakeholders. As any two companies may have a distinct set of stakeholders based upon their industry, location of incorporation, size and corporate structure, to name a few, and it may vary based on factors like the level within the business, the location of operation, teams involved and who you are partnering with. With that caveat, I would say that the predominant sources of reputational risks for foreign multinationals in Southeast Asia include transacting with a local partner which has not been fully vetted, compliance failures, labor unrest and how the situation is handled, social responsibility programs that inadequately measure up to local expectations and mismatched local management, to name a few. In my view, these issues are, for the most part, avoidable. That is not to say that Southeast Asia is an easy place to do business, because it is not. However, with the proper approach, the right partners and executing effective local practices, a foreign company can avoid the vast majority of reputational pit falls.

Emerging Markets ESG:  If you were to map reputational risk in Southeast Asia, would you highlight any issues which are more problematic in certain countries than in other countries?

Brian Sheley: Cascade Asia’s focus is on emerging Southeast Asia, so essentially ASEAN minus Singapore and Brunei. The operational environment of this landscape alone can lend itself to immense reputational risks. Many of these countries lack the regulatory and compliance frameworks that companies rely on to remain within the boundaries established by international standards. That can be a real struggle and pose substantial reputational risk. For example, there is a lamentable lack of sufficient environmental waste infrastructure in places like Vietnam, Indonesia and Cambodia – and now of course Myanmar included – for manufacturing companies. Even foreign brands with the highest of standards expose themselves to tremendous reputational risk in countries where a complete supply chain is lacking.

In Indonesia, an inadequate corporate social responsibility (CSR) initiative is likely to cause distrust among the local community and feed into the perception that the company is solely profit-driven and could care less about the community in which it operates.

For Southeast Asia, the past year has been one of tremendous social upheavals. From Thailand to Cambodia and more recently in Vietnam, each of these countries has experienced historic political and labor unrest which has introduced an onslaught of reputational risks for foreign companies operating there. Earlier this year in Cambodia, workers seeking higher pay clashed with government forces and five factory workers were killed. Issues pertaining to worker compensation, particularly minimum wage, are increasingly becoming a hot button issue and one with tremendous reputational implications.

Emerging Markets ESG: Which stakeholders are most concerned about reputational risk in Southeast Asia?

Brian Sheley: In the context of Southeast Asia, I would argue that local and international NGOs, the media and portfolio investors are the most tuned-in and concerned actors when it comes to reputational issues. The former two are something of enforcers. They are among the groups that help, in a sense, police the reputations of corporate players, for better or worse. Both of these groups are quite active in the region. They are vocal, they are not always fair or rational and there are hundreds of them – thousands in Indonesia.

For their part, investors will simply withhold investment dollars in an effort to avoid the financial implications of reputational issues. Reputations are directly linked to stock prices and are one of the considerations sophisticated investors weigh into their investment decisions.

Emerging Markets ESG:  From your perspective, where is the nexus between reputational risk and socially responsible investment in Southeast Asia?

Brian Sheley: Companies that are tapped into the merits of effectively managing their reputational risk and finesse it in ways that do not come off as self-serving are most likely to be driven by a corporate charter or executive with a responsible bent. With so many policing the situation, execution is not easy but is what sets a company apart. It is this well-executed higher sense of purpose that is likely to drive better financial performance and turn the heads of socially responsible investors.