Chinese Multinationals Face New Risks
A version of this article appeared on Forbes Asia.
In reviewing the facts and figures that dominated a remarkable year, 2016 is likely to be remembered in the markets as the year Chinese buyers became global powerhouses. Over a relatively short period of time, private Chinese companies have flourished domestically and begun expanding overseas. These Chinese corporations are economically competitive, designed to reach a massive scale of consumers with the ability to integrate rapidly-developing and efficiency-generating technologies.
For the foreseeable future, the role of Chinese and Asian corporations in global business is set only to continue growing.
Challenges when going abroad
When expanding overseas, it’s easy to forget that companies will face unique risks and liabilities in every market they enter. This is particularly the case in markets outside of Asia, where shareholder claims and class action lawsuits can cost companies millions of dollars in defense and settlement costs.
This is not a phenomenon restricted to the United States, where companies are generally aware that corporations face a generally more litigious environment. Australia has seen a significant increase in shareholder class action suits in recent years and is now the jurisdiction where corporations are most at risk of facing a class action outside of the US. As at June 2016/2015, AUD 1.3 billion of payments have been distributed as part of shareholder class actions in Australia.1
Employment practices are another oft-overlooked area of liability for expanding Asian and Chinese corporates. Anti-discrimination legislation in developed markets can expose corporations to suits from employees claiming sexual harassment, discrimination, wrongful termination and breach of contract, among a range of other potential accusations.
Meanwhile, expanding corporations must also begin re-evaluating their liabilities in Asia, where regulators are taking an increasingly active role in overseeing corporate governance. Asian regulatory bodies are focused on addressing market misconduct and corporate malfeasance; this is particularly evident in Hong Kong where the city’s Securities & Futures Commission has heightened its focus on corporate investigations.
The nature of liability can change rapidly, and having a corporate presence in multiple countries multiplies this uncertainty. Insurance can help address and mitigate these risks, but a comprehensive solution to risk doesn’t come from a “one size fits all” approach. Companies building an overseas presence should carefully consider the governance requirements for each market in which they will operate.
Directors & Officers insurance, a relative rarity for Chinese corporations in their home market, is a critical element of risk mitigation for boards and officers of Chinese companies that wish to operate in Western markets. Many of today’s best directorial talent won’t even serve on a board without the backing of a D&O insurance policy.
Beyond D&O insurance, Chinese corporations may find themselves best served by a more comprehensive multinational approach that covers a broader range of liabilities across multiple jurisdictions. A multinational program includes a broader suite of products tailored to meet the demands of the business, which could range from property and casualty to professional indemnity or cyber liability.
Global growth is the natural evolution of business in Asia. But it is also an endeavor fraught with uncertainty. By taking a clear-eyed view of the potential risks and rewards, and how to mitigate them on a market by market basis, corporations will set the platform for global success.
1 “The Review: Class Actions in Australia 2015/2016.” King & Wood Mallesons, 26 Aug. 2016, http://www.kwm.com/en/knowledge/downloads/class-actions-2015-2016-year-review-increased-threat-new-normal-20160826.
Accessed 28 March 2017.
The content contained herein is intended for general informational purposes only. Companies and individuals should not solely rely on the information or suggestions provided in this article for the prevention or mitigation of the risks discussed herein.