ALTLOOK: The Alternative Investments Podcast

What can advanced economies learn from emerging markets? In the latest episode of Through the Lens, Kroll Institute Fellow and Senior Advisor Dr. Efraim Chalamish is joined by Rachel Robbins, former General Counsel of the International Finance Council, a member of the World Bank Group, to discuss. Listen as Efraim and Rachel touch on the rise of ESG and the shift towards stakeholder capitalism, how to successfully measure and quantify ESG progress, and the differing regulatory frameworks across emerging and advanced economies.

Dr. Efraim Chalamish is a senior advisor at Kroll, the leader of the firm’s Israel practice and a Kroll Institute Fellow. He specializes in international economic-legal issues, including sovereign finance, energy markets, trade and investment policies and strategies, and international disputes. With more than two decades of professional experience, Efraim has practiced international law in Israel, Paris and New York, and serves as a media contributor and columnist.

Rachel Robbins is a non-executive director and strategic advisor to global companies involved in or entering emerging markets, and currently serves as a senior independent director at Atlas Mara Limited. She previously served as Vice President and General Counsel of the World Bank’s International Finance Council. Before that, she was the Executive Vice President, General Counsel and Secretary of the New York Stock Exchange and NYSE Euronext. Her other prior roles include General Counsel of Citigroup International and Managing Director, General Counsel and Secretary at JP Morgan.

Passages From the Episode

“You and I talked about it in the past, which is the shift towards stakeholder capitalism instead of traditional shareholders capitalism. What does it mean for you and how you started thinking about it a couple of years ago?” – Efraim Chalamish

“I am thrilled with this shift in the view of most large corporations...Not all as we saw with Warren Buffet very recently. But the notion that corporations have a responsibility, not only to their shareholders, but to all of their stakeholders, which includes their employees, their customers, their suppliers, and their communities and the communities in which they work. And this concept, which has been in the emerging markets for decades and has been understood as a social license to operate, was not accepted in the U.S. until pretty recently. I would say the Milton Friedman view that corporations have only a duty to their shareholders and shouldn't get involved in any other issues has prevailed in the U.S. really until the last decade. There's been major change. And mostly in the last several years.” – Rachel Robbins

“When you look at the GCs (general counsels) of today, the next generation, people you coach and train, do you feel they're well-equipped to deal with some of these new issues to deal with the bigger world and society?” – Efraim Chalamish

“I do. And I certainly think that the younger generation, millennials, are demanding it. And they're demanding that companies take a more active role in addressing society's challenges. We saw this in the Black Lives Matter protests. We see it on climate change. So employees and customers are demanding this and managements are responding. Not all of them. It's going to take some time, but I do see that there is a major mind shift that's taking place. And again, it goes back to what I call the social license to operate, that corporations need to show that they are adding value.” – Rachel Robbins

“Can you share with us your take on the ways to succeed with the ESG movement or the stakeholder capitalism movement in a way that people will understand the numbers better?” – Efraim Chalamish

“Well, so this is still very much a work in progress I would say. There have been lots of efforts at measurement. I will say when I first got to IFC(International Finance Council) in 2008 I was quite surprised to learn that the way that development institutions measured their success was how many dollars did we invest or loan in X country? Without any real regard for, was that money well spent? What was the result? And then shortly thereafter, we started to focus on how can we measure those results? And it's quite complicated because you're one piece of a broader investment climate. And how do you know that your dollars made the difference and produced a certain result?” – Rachel Robbins

“So we started working on it at IFC over a decade ago, to move from this volume measurement to trying to measure results and impact. And the IFC has come out with their aim metrics, which is anticipated impact of measurement and monitoring framework. They came out with that a few years ago and that has been adopted by JP Morgan, which has just set up its own development finance institution. But apart from that, you have many other frameworks. You have the SASB, which is trying to create metrics. You have the GRI, the Global Reporting Administrative. You have the GIIN, the Global Impact Investing Network that has its own IRIS metrics. So it's wonderful that we have all these different metrics. What we need... And I think it will happen in the next couple of years, is coalescence around one or two standards that everybody can agree on and will provide a measurement that allows comparability and transparency” – Rachel Robbins

“Since you mentioned processes and a way to go and I know you're very passionate about emerging markets, Africa, Southeast Asia, and you are now working with some institutions in these parts of the world, I wanted to follow up on your point before that sometimes even advanced economies like the US, Western Europe, were behind some of these emerging economies. And that's very surprising because people are familiar with fintech and how African economies are moving fast on fintech, but they don't know enough about what's going on in other parts of the economy. Can you share with us based on your experience in these markets, what can we learn in more advanced economies from these emerging markets based on your work there?” – Efraim Chalamish

“So one thing is in emerging economies, very often you don't have the robust regulatory framework that we have here. And so it has been incumbent on corporations working in those markets... Particularly if they're international corporations, but I would say for local as well, to develop policies to fill the regulatory gaps, whether those are labor policies or integrity policies, risk management policies, because you don't have the regulatory framework that we're used to here in the United States. So corporations have learned that they need to develop their own policies in these markets. And they've also learned that they need the respect of their communities, because if you go into a country and you're taking advantage of the government or you're not respecting the environment or the community around you, there will be a backlash. And so companies have learned that the hard way and have developed in these markets the sensibility of ESG, for example, that we've only come very recently to understand in the United States for most American companies, unless they've been working in those markets.” – Rachel Robbins

“I'm just curious your view on how global companies and institutions should think about risk management and governance challenges as they approach these markets, because you just shared with us the challenge of adapting the practices to the new markets and adopting new policies. Could you please share with us a couple of thoughts on how to do that?” – Efraim Chalamish

“So the first thing I would say is you have to understand the local regulatory environment and local practices, but particularly for international companies, multinational companies, you need your own set of standards because things may be permissible legally in a particular country and it may be normal practice to engage in facilitation payments, for example, in a certain country. But for multinationals, to protect their own reputation they need a global set of high standards that are independent and go above and beyond what the local practice may be. So you need to both respect local practice, but have a higher internal standard, particularly on integrity, governance, risk management, and other policies that credit... I mean, a lot of other areas.” – Rachel Robbins

“From your experience, why [are institutions] still dealing with this whole world of conflicting duties?” – Efraim Chalamish

“Well, so in many international organizations, whether they are partnerships or even incorporated, the board represents a certain constituency. So they could be governments. They could be civil society. They could be other international organizations, but particularly with governments, the board member is often there and taking instructions from their home capital. So in the case of the US, the treasury department may give instructions to a board member at the World Bank or IFC. And those instructions will reflect US policy. And the board member has that has a fiduciary duty to represent the views of its constituency, but it also has a duty to act in the best interest of the entity on whose board it serves, the World Bank or IFC, for example. And sometimes where the World Bank or IFC want to go may clash with a particular foreign policy of the United States.” – Rachel Robbins

“And so it's very tricky for board members to be able to balance these conflicting interests. And a good board member can do it, but it remains a challenge. And it remains a challenge in many organizations where the board member has this dual responsibility both to represent its own constituency, but also to act in the best interest of the organization on whose board it sits. And so that's a very different kind of governance challenge than you have in a private board where you have independent directors who aren't representing any particular constituency.” – Rachel Robbins