2020: Challenges and Opportunities
As we head into 2020, we wanted to share with you, based on our worldwide advice to clients, some of the likely challenges and opportunities we see facing corporations around the globe in the coming period. We believe the following are key areas to watch for any Israeli company operating an international business.
Innovation is happening all around us, no matter what your industry. While the challenges vary, the overall goal is the same — to remain relevant in an era in which technology can render obsolete even the most storied companies. We have seen this in recent years with Kodak, Blockbuster and Toys R Us, to name just a few high profile examples.
At the Tokyo Olympics this coming year we will see, among other new technology: driverless cars, facial recognition on a grand scale, and robots to assist with many tasks including luggage at airports.
While this drive towards innovation will bring with it increased efficiencies for company and consumer it will also bring along many difficult to contend with side-effects. We have been working with many of our clients on tackling the cutting edge legal issues raised by the ever changing ways of doing business.
For Israeli companies, innovation poses a challenge but also a major opportunity. The worldwide perception of Israel as an innovation hub shines a spotlight on Israeli companies, many of whom are positioned to capitalize on the need for multinational corporations to innovate.
2. Environmentalism and sustainability
Sustainability is becoming a key issue for the public, and must be at the top of company agendas.
In just the law few months we have seen the following developments:
- In September, we saw large-scale climate strikes across the globe led by young people — the future customers and members of the workforce.
- In October, the NY Attorney General’s office went to trial with Exxon Mobil, alleging that Exxon had misled shareholders regarding the impact of its business on climate change (Exxon won at trial earlier this month).
- In November, the UK-based activist hedge fund TCI sent letters to a number of companies threatening to vote against incumbent directors if they do not improve their sustainability disclosures.
Conforming your business to sustainability norms has become a key element of corporate strategy. Companies need to get smart about how to do that in innovative and cost effective ways. In keeping with the theme of the Tokyo Olympics discussed above, it is not just Japan’s tech-prowess that will be on display during the games, but also innovative ways to be more sustainable. The medals presented to athletes have been made from metals extracted from used smartphones and other electronic devices.
We are helping lots of clients with these issues, and recently, we were engaged by the United Nations to produce a global report exploring whether and how legal frameworks allow for — and incentivize — investors to consider sustainability impact across major markets.
3. Antitrust / the rise of protectionism
Experienced businesspeople will know that antitrust law bears critical implications for their companies, whether in regard to the need to avoid cartel behavior or to competition considerations for mergers and acquisitions. These considerations have gained importance in recent years as antitrust law becomes increasingly institutionalized in previously less regulated economies and as positions taken by companies in one jurisdiction may bear follow-on impacts in other jurisdictions. A few points to highlight for the coming year:
- Pressure on Big Tech — Over the last year antitrust regulators in the EU and the US have been exploring whether ownership, aggregation, acquisition, or certain uses of consumer data sets provide an unfair competitive advantage. Some regulators have openly proposed the break-up of “big tech”.
- Impact of Brexit — The UK’s intended exit from the EU will result in the UK’s Competition and Markets Authority (CMA) gaining jurisdiction over a significant number of deals previously subject exclusively to EU review. These deals are often the largest and most complex cases. Current political uncertainty means that it remains unclear how and when this impact will be felt.
Protectionism — Regulators in many countries are moving to restrict foreign ownership of sensitive industries or national champions, using principles of antitrust and trade law to scuttle deals like the proposed merger of Fiat Chrysler with Renault, a deal briefly contemplated during the summer of 2019. Among other countries, over the last year Japan announced tighter scrutiny of foreign investment into industries related to national security. The same is true for Germany and the US. As our Israeli readership will know, as a result of mounting US pressure, the Israeli cabinet recently voted to establish a committee to oversee foreign investments in Israel, so this is particularly an area to watch locally.
4. Geopolitical risk
The coming year promises to be a momentous one geopolitically, with a third round of Israeli elections in the Spring and US presidential elections in November. US-China trade tensions, the continuing Brexit saga, global climate change and many other factors will impact companies operating globally. The repercussions will be felt by employees, customers, suppliers, and on revenues and profits. Although geopolitical risks are inherently difficult to predict, corporates must take into account their impact in setting strategy and goals for the next year.
5. Corporate stakeholders
The last year saw remarkable developments in the long running debate about the nature and purpose of the corporation. Over the summer, the Business Roundtable, a leading corporate association comprised of CEOs of America’s largest companies, announced the end of “shareholder primacy” and emphasized a commitment to various groups of stakeholders in addition to shareholders — customers, suppliers, employees, and communities.
Following the announcement, the Council of Institutional Investors (the leading association of institutional investors in the US), voiced their disapproval of the Business Roundtable position. Just in the last month, the British Academy and the World Economic Forum have taken positions similar to that of the Business Roundtable, endorsing a stakeholder view of corporate governance.
This is of course not a new debate in Israel. As the debate evolves into 2020 and various stakeholder groups claim the attention of corporate resources, senior management and Boards of Directors will need to get themselves up to speed on this fundamental issue.
6. Shareholder activism
In 2019, activist investors continued to widen their sights outside of the US. By some estimates, activist hedge funds now manage over $250 billion, and with some individual funds now topping $40 billion, no public company, however large, is safe from attack. As dispersed shareholding becomes increasingly common for companies traded on TASE, and as activist funds become increasingly familiar with the Israeli market, we expect to see a continued rise in activist situations in Israeli companies in 2020 and beyond. Shareholder activism is also increasingly impacting Israeli companies abroad — the blocked attempt by Gazit Globe to take Atrium private is just one example from the last twelve months.
7. Disputes: risk and opportunity
Litigation and arbitration are double-edged swords. While our corporate clients are often on the defensive side of these claims, courts and arbitration forums may also present opportunity: whether to keep a competitor from misusing your proprietary technology or for redress against a wayward counterparty. A trend we see continuing into 2020 is the increasing openness to international arbitration as a more effective and neutral forum for redress than national courts when resolving disputes abroad. Companies entering new ventures with foreign counterparts or in foreign countries should consider in advance whether their business agreements should include arbitration provisions. They should also take care to structure their investments so as to enjoy protection of applicable investment treaties and their access to international arbitration rather than national courts.
8. Regulatory risk and tone at the top
We live in a highly regulated world, and regulators across different jurisdictions are increasingly cooperating with one another to bring enforcement proceedings. This means a bribery problem in one country may quickly also become a problem in Israel, the US, or the EU. Despite this, we have seen that regulators often apply an inconsistent or nationalist approach, which makes compliance across borders exceedingly tricky.
The cornerstone of healthy corporate culture is what has become known as “tone at the top” — the attitude of the board of directors and senior management towards ethical behavior. Everyone now recognizes tone at the top as critical to managing misconduct risk. But execution can often be a challenge — there can be difficulties getting leadership’s time or attention, or in aligning messaging or — even where there is clear buy-in and alignment, finding ways to effectively demonstrate the tone from the top across a large organization can be challenging.
Leading businesses have hit headlines with reports of “toxic” and mismanaged work environments. Culture and governance is not only critical to recruit and retain talent, but it also negatively impacts company valuations and share prices. It is important for an organization to be prepared to deal with situations as they arise, and take quick steps if necessary.
9. Crisis preparedness
In today’s world businesses can be subject to sudden crises, “life or death” experiences for the firm. While crises are dangerous they may even present opportunity if well-handled. The key is being ready and knowing, to the extent possible, the nature and level of risk your organization faces and having a robust disaster management plan in place. In our experience, being ready to act deftly in the first 48 hours is critical. One helpful step is pre-planning responses to the most likely crisis scenarios and identifying the team, including internal personnel, outside PR advisors and law firms, that you will call upon if crisis strikes.
10. Cybersecurity and data protection
Managing and protecting data continues to remain a key issue for all businesses, whether operating locally or globally. With data protection laws and regulations in place for a few years now, we are beginning to see stiff consequences for violations. For example, in July 2019 the US Federal Trade Commission handed Facebook a $5 billion fine for failing to adhere to user privacy regulations, and in October 2019 the first multimillion dollar fine was issued in Germany for a company not having proper data retention schedules in place.
On January 1, 2020 the California Consumer Privacy Act (CCPA) will come into effect. Time will tell how the CCPA impacts on businesses, but it is likely to have far-reaching consequences well beyond California. Following on from the CCPA and the now famous GDPR, we expect more jurisdictions to enact similar privacy-focused legislation, so this is a space to watch for any company doing business digitally.
Please find the Hebrew version of the briefing attached below.