What is Legal and Reputational Risk for International Business Transactions?
Reputational risk refers to threats or dangers to the name or standing of a business.2 Such threats can result from the direct actions of the company, its employees or partners or, in international business transactions, cultural or legal differences. Examples of a reputational risk event could be the loss of personally identifiable customer information in a cyberattack or a leak of financial information. According to a Deloitte research report, recent reputation-damaging events typically fall into two categories: organisations not meeting stakeholder expectations by exhibiting poor internal management, malpractice, or poor product and service delivery; or ineffective management response to a crisis.3
Events in either category can arise from ethics and integrity violations such as fraud, bribery and corruption or security risks (both physical and cyber). These can have greater or lesser impact on international business transactions, depending on where a company is doing business and cultural attitudes in those foreign countries towards a particular reputational risk event. Privacy issues, for example, are of concern to information technology companies due to the widely different views of privacy held in disparate regions. Reputational risks can tarnish a company’s brand and lead to material revenue loss.
There are several definitions of legal risk. Some focus on the risk of loss arising from non-compliance with laws, while others focus on the uncertainty created by the governments that pass those laws. Regardless, legal risk is an “all-pervasive threat.”4 In the international business setting, legal risk may arise from non-compliance with local banking laws, which are often diverse and complex when considering products or services made available in many countries. There is also the possibility of litigation resulting from any failure to properly transfer funds in an international business transaction.
International Business Transactions In The Age of Social Media
The power of social media amplifies risk because a seemingly minor incident can rapidly become a reputational nightmare. In the words of a chief risk officer for a large Australian insurance and financial services firm, quoted in an article on Forbes.com: “There’s been a recognition that with the increasing influence of social media and social media sites, as well as activist sites, issues can escalate very quickly. This can threaten your reputation more significantly than in the past. As a result there’s more sensitivity to reputation risk in the context of those types of social developments and technology developments over the last five years.”5 The tendency for social media to worsen reputational risks can be exacerbated by the interactions between different countries’ cultures that occur in any international business transaction.
Benefits of a Positive Corporate Reputation
Some companies do an inadequate job of managing reputational risk, tending to focus their resources on repairing reputational damage that has already occurred.6 The benefits of having an excellent legal and reputational risk management process in place come with time. Rarely are there instant positive results – but the benefits can be significant in the long-term. Companies with positive reputations foster greater customer loyalty, are perceived as providing more value (and, therefore, can usually charge a premium) and attract better employees.
The Role of Global Transaction Services
As in any business partnership, the reputation of a company’s payments partner for international business transactions really matters. Choosing a global transactions services partner of high reputation and expertise in international payments can be a good way to manage the risk associated with doing business in many countries at once. Any such partner should have sufficient resources dedicated to protecting the security of financial information while international business transactions are in progress. The additional security that comes with using a reputable global transactions services provider adds value to any cross-border transaction.
Further, international business transactions by definition involve a variety of differing foreign laws and legal standards. Rarely can a company be fully aware of the nuances and intricacies of all relevant foreign laws, including those for money transfers and banking. Working with a global transactions services provider that already has a strong presence in many markets can help to minimise this risk, because it demonstrates that the payments provider has experience complying with diverse local laws. Additionally, companies that provide global transaction services can help other businesses overcome the legal risks associated with purchasing, selling or exchanging currency.
The Importance of Acting Pre-Emptively In International Business Transactions
While it’s crucial to take steps that minimise risks in the present, it is also important to plan for the unexpected in the future. By improving their reputation and polishing their image in the present, companies can mitigate any future reputational risk that may crop up. A positive reputation can be sustained in the long-term by aligning strong corporate values with ethical and socially responsible business behaviour. One way of doing this is to implement an effective corporate social responsibility program. Corporate social responsibility is a term for business practices involving initiatives that benefit society.7 As millennials comprise a growing share of the population, the focus on corporate social responsibility will become increasingly important because millennials are more responsive to corporate sustainability actions.8
Effectively managing the legal and reputational risks inherent in international business transactions involves many steps. These include things a company can do for immediate effect, such as contracting with a reputable global transaction services provider. Further, companies can pre-emptively prepare for unforeseeable future events by burnishing their reputations for long-term sustainability or corporate social responsibility.
- "Warren Buffett’s Boring, Brilliant Wisdom", Time; http://business.time.com/2010/03/01/warren-buffetts-boring-brilliant-wisdom/.
- "Reputational Risk", Investopedia; http://www.investopedia.com/terms/r/reputational-risk.asp.
- Reputation matters: Developing reputational resilience ahead of your crisis, Deloitte; https://www2.deloitte.com/content/dam/Deloitte/uk/Documents/risk/deloitte-uk-reputation-matters-june-2016.pdf
- Legal and Compliance Risk Management: Towards Principles of Best Practice, The London School of Economics; https://www.lse.ac.uk/collections/law/staff publications full text/black/6751 Legal.pdf
- "Reputation Risk Leading Company Concern in 2015", Forbes; http://www.forbes.com/sites/tatianaserafin/2015/01/05/reputation-risk-leading-company-concern-in-2015/#599d85884ce5
- "Reputation and its Risks", Harvard Business Review; https://hbr.org/2007/02/reputation-and-its-risks
- "What is Corporate Social Responsibility?", Business News Daily; http://www.businessnewsdaily.com/4679-corporate-social-responsibility.html
- Global Consumers Are Willing to Put Their Money Where Their Heart is When it Comes to Goods and Services from Companies Committed to Social Responsibility, Nielsen; http://www.nielsen.com/us/en/press-room/2014/global-consumers-are-willing-to-put-their-money-where-their-heart-is.html