Politics, Law And Business In The Digital Age

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The global economy is marked by two major trends that collide to increase risk exposures for companies in the digital economy. First, ill prepared, undefined regulatory frameworks for innovative technological products and services expose investors to policy changes that prevent them from implementing their business model. Second, political shifts toward protectionist policies provide sovereign and sub-sovereign government officials with the political will to implement such regulations.  For these reasons, risk management in the current investment climate requires the collaboration of savvy professionals with different areas of expertise.

When technology companies introduce new products and services where no regulatory framework exists, legacy local businesses often pressure government officials to implement burdensome barriers to entry. These barriers often come in the form of regulations with which investors have difficulty complying. In order to manage these risks, companies need the collaborative efforts of legal and regulatory experts, political affairs departments, and business executives.

Regulatory Expropriation —Airbnb Example

After an initial period of success, Airbnb’s ventures in Western Europe ran into significant roadblocks. Complaints from hotel owners whose margins were falling and others who were upset about surging rental prices compelled government officials to take action. In Reykjavik, Dublin, Barcelona, Berlin, Hamburg and Munich, politicians passed laws and regulators enforced regulations that actively discourage homeowners from opening their homes to visitors. (E.g., onerous license requirements, excessive fees for registering, and fines against landlords, etc.) Whereas competitors in the hospitality industry are more than happy to engage in this process, local home and apartment owners are not. As a result, the number of places for visitors to rent has significantly declined and Airbnb’s ventures have suffered.

Host Government Discrimination: Falling Through the Cracks

While many decision makers for expansion projects are aware and afraid of government discrimination against inbound investors, traditional risk management methods often fail to identify it as a risk. Under traditional risk management procedures, the risk manager would likely not know about regulatory expropriation as a risk scenario because insurance policies do not cover it. As a result of the fact that lawyers and risk managers are not included in pre-investment due diligence of expansion decisions, regulatory discrimination slips through the proverbial cracks of risk identification processes. Effective management of this insidious risk requires the collaboration of in-house counsel, compliance, government affairs personnel, and executive decision-makers.

Collaboration of Lawyers, Political/Government Affairs, and Businessmen

While the traditional risk manager will not identify this risk, a lawyer who works with government affairs specialists has the experience to manage it.  In-house lawyers are often responsible for compliance with regulations, and consequently, have experience adhering to overbroad and arbitrary rules that are the product of protectionist politics.  The lawyer has also worked on disputes between governments and inbound investors that arise out of regulatory risks. For these reasons, lawyers are in perfect position to identify regulatory discrimination as a primary risk. The government affairs representative is responsible for managing the relationship between state and local representatives and the business. In this capacity, the government affairs representative can align the interests of the company with those of politicians and discourage public officials from targeting them in the first place.  For these reasons, the government affairs experts can mitigate the exposure to such risks. Having listened to the assessment of the lawyers and government affairs personnel, the executives will weigh the project related risks with the potential rewards to make a decision about the expansion.

In this case, the risk arises out of political interests of government officials who represent incumbent businesses. Companies in the digital economy and beyond who are making investments who fail to consider the interaction of politics and legal requirements do so at their own peril.

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The global economy is marked by two major trends that collide to increase risk exposures for companies in the digital economy. First, ill prepared, undefined regulatory frameworks for innovative technological products and services expose investors to policy changes that prevent them from implementing their business model. Second, political shifts toward protectionist policies provide sovereign and sub-sovereign government officials with the political will to implement such regulations.  For these reasons, risk management in the current investment climate requires the collaboration of savvy professionals with different areas of expertise.

When technology companies introduce new products and services where no regulatory framework exists, legacy local businesses often pressure government officials to implement burdensome barriers to entry. These barriers often come in the form of regulations with which investors have difficulty complying. In order to manage these risks, companies need the collaborative efforts of legal and regulatory experts, political affairs departments, and business executives.

Regulatory Expropriation —Airbnb Example

After an initial period of success, Airbnb’s ventures in Western Europe ran into significant roadblocks. Complaints from hotel owners whose margins were falling and others who were upset about surging rental prices compelled government officials to take action. In Reykjavik, Dublin, Barcelona, Berlin, Hamburg and Munich, politicians passed laws and regulators enforced regulations that actively discourage homeowners from opening their homes to visitors. (E.g., onerous license requirements, excessive fees for registering, and fines against landlords, etc.) Whereas competitors in the hospitality industry are more than happy to engage in this process, local home and apartment owners are not. As a result, the number of places for visitors to rent has significantly declined and Airbnb’s ventures have suffered.

Host Government Discrimination: Falling Through the Cracks

While many decision makers for expansion projects are aware and afraid of government discrimination against inbound investors, traditional risk management methods often fail to identify it as a risk. Under traditional risk management procedures, the risk manager would likely not know about regulatory expropriation as a risk scenario because insurance policies do not cover it. As a result of the fact that lawyers and risk managers are not included in pre-investment due diligence of expansion decisions, regulatory discrimination slips through the proverbial cracks of risk identification processes. Effective management of this insidious risk requires the collaboration of in-house counsel, compliance, government affairs personnel, and executive decision-makers.

Collaboration of Lawyers, Political/Government Affairs, and Businessmen

While the traditional risk manager will not identify this risk, a lawyer who works with government affairs specialists has the experience to manage it.  In-house lawyers are often responsible for compliance with regulations, and consequently, have experience adhering to overbroad and arbitrary rules that are the product of protectionist politics.  The lawyer has also worked on disputes between governments and inbound investors that arise out of regulatory risks. For these reasons, lawyers are in perfect position to identify regulatory discrimination as a primary risk. The government affairs representative is responsible for managing the relationship between state and local representatives and the business. In this capacity, the government affairs representative can align the interests of the company with those of politicians and discourage public officials from targeting them in the first place.  For these reasons, the government affairs experts can mitigate the exposure to such risks. Having listened to the assessment of the lawyers and government affairs personnel, the executives will weigh the project related risks with the potential rewards to make a decision about the expansion.

In this case, the risk arises out of political interests of government officials who represent incumbent businesses. Companies in the digital economy and beyond who are making investments who fail to consider the interaction of politics and legal requirements do so at their own peril.

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