Sovereign risk and social responsibility

Energy is another area where, I suspect, the danger of sovereign risk has been very much overlooked, although there are now increasing signs that electoral imperatives will lead to increasing government intervention in the market place and, unless electricity can be provided reliably and cheaply no government of any political complexion will be able to withstand the grass roots determination to have light, heating and cooling at prices they can afford, regardless of what that might do to the share price. Saving the planet is a nice slogan but your customers still expect to be able to use their air conditioner when it’s hot and their heater when it’s cold, and want to be able to afford to pay the bills. The renewable energy lobby can complain to the heavens about “sovereign risk”, but when push comes to shove our elected representatives, of whatever party, will be forced to do whatever it takes to keep the lights on or the gas flowing.

It’s easy to blame “populist” politicians for these problems and I have heard many business people assert that politicians should act “more rationally”. But, as a very senior public servant once put it to a conference of young up and coming bureaucrats, politicians, particularly ministers, always act rationally---if one sees things from their perspective. “You see,” he said, “your job is to provide your minister with frank and fearless advice after you have considered all the options and alternatives. But the minister’s job is to get elected, first into Parliament and then into the ministry. If he’s not in parliament he can’t be a minister, and if he can’t be a minister he can’t do the important works he believes he must do, including, when he deems it appropriate, accept or reject your advice.

“And if your advice proposes something that will make him lose his seat at the next election and if he acts rationally he will reject it. That is being totally rational. The fact that what is rational for one person does not mean that exactly the same thing will be rational for the other.”

Social responsibility doesn’t mean caving in to the demands of noisy ideologues. It means taking into account the job the business is supposed to do for those who consume the products and services it offers: satisfy them with reliability and safety at prices they can afford to pay. Any business that does that need have no fear of sovereign risk. Those that put their perception of social issues ahead of customer needs will find things very different.

As obvious as it may seem, an organisation’s best protection against “sovereign risk” is a base of satisfied customers. Despite their faults (and they have many) most politicians take the line of least resistance.  Health insurers, banks, supermarkets, superannuation funds and energy suppliers have at various times forgotten the importance of keeping their customers on side, and that is why they are at risk. Attacking consumers, rather than companies, tends to be a risky business for a politician. If a company has the support of its customer base it will be a rare government that dares take it on….and if it does, to paraphrase former ALP National Secretary David Combe, it “won’t be in office often or long.”

In this context the role of the director is to assess the likely political impact of company decisions, and if they are likely to create problems for a government, what mitigation and risk management strategies need to be adopted to avoid or minimise sovereign risk. A good way of doing this is to determine whether a corporation’s actions are, in fact, not just in shareholders’ interests  but also seen by its staff, its customers and suppliers as being in their interests. Directors who ensure this perception need have no fear of sovereign risk. Those that ignore it do so at great peril.