Boyden Leadership Series Interview

FTI Frank Holder 

Boyden's Leadership Series presents discussions with business and thought leaders from organizations across the globe. The series focuses on topical issues that offer executives, political leaders, and themedia insight into current trends in business and talent management in the global marketplace.

This issue features Frank Holder, Chairman of FTI Consulting Latin America. He discusses managing ethics across global markets, the impact of the Latin American presidential elections, Mexico’s bold reforms and Brazil’s crossroad to move to the next level, multilatinas expansion, and his deal breakers and deal makers when evaluating talent. 

Based out of Miami, Mr. Holder oversees FTI Consulting’s offices in Buenos Aires, Bogotá, Madrid, Mexico City, Panama City, São Paulo and Rio de Janeiro. Since 2007 he has also led the company’s forensic and litigation consulting practice in Latin America.

Mr. Holder is an expert in risk management, national security, operational risk and money laundering. He has directed corporate investigations and security consulting assignments in Latin America and the United States, including large-scale internal fraud and public corruption investigations, product protection, litigation support, due diligence and hostile takeovers.

In 2005, Mr. Holder founded Holder International, which was acquired by FTI Consulting in 2007. Previously he served as President of Kroll Inc.’s Consulting Services Group, responsible for operations in more than 35 countries, and was head of Kroll’s Latin American and Caribbean region. Before joining Kroll, Mr. Holder was President of Holder Associates in Buenos Aires, Argentina, a risk mitigation and business intelligence firm.

He began his career with the U.S. Air Force as a political-military analyst for the U.S. Embassy in Argentina and as a special agent for the Office of Special Investigations at Langley Air Force Base in Virginia. He is the author of two books: Narcotics Trafficking: A Constructed Typology of the Deviant Market for Illicit Drugs (1997) and Integrity in Business: Developing Ethical Behavior across Cultures and Jurisdictions (2013). 

Boyden: What was the inspiration for your new book, Integrity in Business: Developing Ethical Behavior Across Cultures and Jurisdictions?

Holder: The last book I published was nearly 20 years ago and it was connected to my doctoral dissertation. I had been thinking about writing a book for some time, basically because I have spent an awful lot of time in the field with clients. I’ve learned a lot over all these years and I’ve seen a lot of the major problems they face in reputation management or operationally.

Particularly in recent years, because of all the scandals and major frauds that have occurred, and all of the new waves of regulation that have come out in response to them, it just seemed to me that there were some lessons to be learned. Also the book offers readers an opportunity to understand on a real-time basis a lot of the mistakes being made and some maybe even counterintuitive lessons on what works and what doesn’t work.

Boyden: What are the most important basic actions a CEO can take to ensure an ethical management team and workforce? 

Holder: Some of these may seem counterintuitive, but the first thing I would say is that soft power works better than hard power in this area.  People visualise  big compliance departments and large investigations and people walking out of the office with their heads hung low in handcuffs.  The reality is that nothing works better than the different tools of soft power to avoid these sorts of major ethical breaches that we’ve seen over and over again in big companies.  

The first example that comes to mind is kind of like when the military comes out and says that funding for the State Department should be increased.  I’m involved in the hard power side of this but I’m recommending that funding be increased for the soft power side.  It works a lot better to prevent problems than to have to react to them and deal with the fallout afterwards.

One of the most powerful soft tools is tone from the top. One common element that we find in major ethical breaches or integrity breaches is that there is no clear top-down message from the CEO saying, “We will not tolerate corruption, we will not tolerate unethical acts; this is what our code of ethics is and this is what we live by.”  Sometimes it’s difficult for that tone to reach every corner of the world at a company, but it’s incredibly important because in today’s world of social media and all the different technological platforms that bring things to your doorstep immediately, an ethical problem in Kazakhstan is just as bad as one in New York.  It’s going to hit New York in a matter of seconds. You have to work really hard to make sure that clear, strong tone gets out there.  

Another thing that’s important to understand is that when you are involved in transactions or you are involved in growth, it’s important to understand the culture of the company you are trying to buy or the culture of the market you are trying to enter, and make sure that you have a method and a plan for imposing the non-negotiable code of conduct or ethics that your company represents across that geography or across that new company.  In some cases, the culture of the target company may be completely incompatible with yours, in which case you should look for another partner.

Boyden: The younger generations today are more attuned to the responsibility of who they buy from and do business with, probably more than previous generations.

Holder: That’s incredibly clear.  I would also say that one of the common mistakes CEOs make in these plans has to do with the disposition of compliance resources.  In the United States you’ll have a bank that has hundreds of compliance officers and yet in Mexico, where they have a much bigger risk of a breach, they have maybe less than a dozen.  It’s an inverse pyramid of risk and resources.  There’s a logical explanation for that however, which is that the more litigious and enforcement-oriented markets like the US and UK tend to expand their resources very quickly.  

The problem is that a lot of times if you trace where the issue originated, although some do originate in the US and Europe, most of them originate out of emerging economies where the companies have almost no resources on the ground and very little understanding of the local context.

Boyden: Where do otherwise benevolent leaders fail in optimising ethical behaviours across their organisations? 

Holder: Again, not allocating resources where they are needed is often the biggest failure.  Most leaders actually spend enough money on compliance and ethics programmes.  We don’t find that most well-constituted companies skimp on the cost.  But the way they allocate their resources is mismatched with the risks that they face. 

Obviously an even bigger problem is if there isn’t a proper tone from the top and an overarching programme around it with functional awareness, training, whistleblower hotlines, etc., then the company will have a major ethics breach at some point. It’s just a question of time. Presupposing that this exists, the second biggest issue is where companies deploy their resources.

Boyden: How do organisations stand out for ethics and what are the areas where you expect CEOs and companies to push for a stronger footing?

Holder: What we are seeing is that companies are actually spending a lot of money on compliance now.  I’m insisting that that’s not necessarily the best spend.  I think a better spend would be on education, training and awareness.  But you obviously do have to spend money on compliance, so it’s a good sign that companies are spending more on compliance.  But they probably need to spread that into some of the more preventative aspects as well.

Boyden: In Latin America, Brazil and Colombia will hold presidential elections next year and there will be a new president in Argentina in 2015. From a business perspective, what will be most important to watch?

Holder: The first thing to look at in Latin America is that we have something going on right now that is unique in the region’s recent history, which is that there’s a bifurcation of the evolution of its markets into two clumps.  You can no longer speak of Latin America as one region in terms of the way their economies are performing.  On the one hand you have what we call the Pacific Alliance, which is all the countries that face the Pacific. That includes Mexico, a chunk of Central America, Costa Rica and Panama being the most prominent among them, and Colombia, Peru and Chile, all of which have stronger, more open economies. They allow for capital inflow and outflow pretty freely, have strong direct foreign investment currently and are developing rapidly. These are more market economies that are trying to become more productive and competitive in the world economy. They are facing Asia, which is the new big player in the world market.  

On the other hand you have what used to be the traditional powerhouse economies that are languishing.  That’s Venezuela, Brazil and Argentina.  The Atlantic countries are actually in a slump.  They’ve decided to take a different path as protectionists. They have capital restrictions and they treat foreign investors differently than they treat their own local investors.  They are mired in complicated tax structures and bureaucracy.  They also have big deficits in infrastructure in order to try to manage the growth they are witnessing.  Despite the fact that these three economies have enormous natural resources on the commodities side, Venezuela in oil and gas, and Brazil and Argentina more in the agro areas, they are languishing compared to their peers due to all of these other issues and this sort of macro direction they’ve taken with their economies.

Brazil obviously is a bit of an exception just because of how big that economy is in and of itself.  It enjoyed for a very long time an almost monopoly in direct foreign investment in the region.  That’s come down very quickly now and the economy has too.  That’s why you are seeing protests on the streets in Brazil.  The economy is being very lethargic and there is concern as to the future of that market.  

As for the presidential elections in Colombia, I don’t think that’s going to alter the course of the economy.  It’s pretty strong right now and probably will continue to be.  It’s likely to delay some direct foreign investment though, since there’s always a little uncertainty around these transitions, but we don’t see any major hiccups there.  

In the case of Brazil and Argentina the next year is expected to be very different.  Likely the election is going to be about where they want to go as a country macro economically speaking.  

In Argentina’s case the situation is just dire.  It’s almost as bad as Venezuela. I believe there is going to be a major political regime change.  Brazil right now looks likely to re-elect Dilma [Rousseff].  If that happens, it will be four left of centre PT governments in a row, two for Lula and two for Dilma.  Although that’s certainly not a guaranteed thing, I think we have to watch closely to see what happens with the economy, especially with the upcoming World Cup.  If the economy continues to languish, Dilma may have a problem going into elections.  They may move towards a more open market and try to make some of the reforms they desperately need.  

Boyden: Brazil’s economy has taken a step back after several years of strong optimism. Do you see any opportunity with the World Cup and the Olympic Games to restore confidence, even though the main events will be on the pitch and not in boardrooms and investment houses?

Holder: I do, but having said that, the only way to do that will be for them to undertake some major reforms at the same time.  Brazil desperately needs tax, labor and pension reform.  It’s got the highest tax burden in Latin America.  It’s incredibly complex. It’s got a pension system which, despite adding new members every year, is running in a deficit because it’s overly generous, particularly to government employees. Brazil has some of the highest labor costs in the world because the fringes are almost 80% of base when you hire an employee.  

If none of those three things change, you could have two World Cups, three Olympics and move Barcelona and Real Madrid to Rio and São Paolo respectively and it’s not going to help if they don’t develop a reform agenda, which is very difficult to do politically in Brazil because of how fractured the political parties are right now.

My answer to you is certainly the World Cup and the Olympics will help.  They will certainly bring attention back on Brazil.  It will be a celebration.  But two things could derail that - one being if they don’t undertake any real assessment or reform that’s absolutely desperately needed, and the second is if they have massive protests because of the anemic growth as a result of not doing structural reform.  

Boyden: In addition, Chile and Honduras have had elections, and then Uruguay and Panama will hold presidential elections next year as well.  Historically smaller nations and their leaders have played bigger roles in Latin American regional trends. How do you see this potentially playing out?

Holder: I do think that again Chile has had an incredibly consistent and coherent macro political and macro  economic agenda over the years since its military dictatorship ended.  Bachelet is not going to bring any negative surprises; at least we don’t see any on the horizon.  She does look likely to win but I don’t see any major changes there.  

Even though Chile is a smaller market it’s very important in terms of the trends it sets and where it goes as an economy.  I think it will have a positive influence.  Bachelet herself, because she’s been President before and because she’s had a multinational and multilateral role in her tenure, could also have a larger than life political influence on the region that I think could be positive.  Even though she’s technically a bit left of centre compared to the current regime, she would be seen as a stabilizing force, a pro-market force and somebody whom  the region respects.  

The other smaller economies are a little less difficult.  Panama, no matter who wins, will have a very strong economy.  It’s very pro-market so no matter which candidate wins, it’s not likely to see a lot of change.  They don’t necessarily punch above their weight politically speaking though – not as much of an impact as Chile but they are seen as a positive influence nevertheless.

Uruguay is kind of a question mark. Mujica’s been a really good president. Their economy has done very well.  It’s not following the trend of the other Latin countries that are languishing with high inflation and low growth.  

Boyden: A number of companies have centred on Chile as a global test market for emerging markets. Chile is a benchmark.

Holder: It’s kind of like if South America were the US, Chile would be California.  It’s a place where a lot of innovation occurs now.  It’s growing and attracting a lot of the high tech companies. Google, for instance, put one of its first facilities in Latin America there.  You have a lot going on there in that sense of trendsetting, tested, incubator type activity.  

Even though in recent years the economy hasn’t performed quite up to the level that perhaps one would have expected, it’s still outperforming most of Latin America.  Aside from the fact that it obviously has a commodities advantage with major copper exports, it’s managed to ride the ups and downs a little bit better than some of the other commodities-based economies.

Boyden: What’s your view of Mexico, a year into President Enrique Peña Nieto’s rule, in terms of the business environment? From the corporate view, what will Mexico need to do to continue  its momentum?

Holder: Mexico is one of my favourite markets in the region currently, in terms of my belief of prospects for growth.  However, it’s growing anemically right now.  Even economists seem to be in a bit of a conundrum trying to explain that.  Peña Nieto has made a grand pact with the political parties.  He’s pushing through a very aggressive reform agenda which will be capped off by the energy reform which includes the reform of Pemex.  I believe he’s going to be successful at that, and that’s going to attract some very significant interest, particularly out of mid-sized US oil companies, but also around the world in terms of joint ventures and helping lift oil and gas production in Mexico back to some of the levels it had achieved before.  

Pemex is hogtied.  Its money is too committed to other things.  That’s forcing a lack of exploration which is forcing declining production, which in turn means declining revenues and budget for the Mexican government. That cycle has to be broken.  Peña Nieto is taking a huge risk in breaking this cycle and I think he’s going to be successful.  I would have expected the economy to be growing faster now than it is.  The reason I say that is we’ve had a number of major corporate clients that 15 years ago moved their facilities from Mexico to China to produce or assemble goods because of a wage arbitrage and have now moved them back to Mexico because wages in China have risen significantly, to the point where it’s actually less expensive to produce in Mexico again.

The country is seeing larger amounts of direct foreign investment than they’ve had in the past.  But the economy is still a bit lethargic compared to where we think it should be.  Mexico’s challenge is to be more productive.  The productivity in Mexico hasn’t risen for years.  Part of this wave of new investment is based on wage arbitrage which isn’t sustainable long term.  The reason why Peña Nieto is trying to reform the telecommunications and labor and energy industries is because he wants to make Mexico a truly global competitor.  Of all the markets in Latin America, one has to understand that Mexico alone exports more than all the rest of Latin America put together.  

The public security problem really has two aspects.  One is the real problem where you’ve got the police and military at war with organised crime from the drug cartels.  Then you have the perceived problem owing to the fact that earlier, security-related crimes were in the press every five minutes. This created a perception of a highly unsafe country, and despite some improvements, the public insecurity persists.  

Boyden: Has Peña Nieto taken on some of the reforms that needed to happen?  He’s done what nobody in Brazil has really done.

Holder: Exactly. Peña Nieto is doing in Mexico what somebody needs to do in Brazil.  I’d like to send him down there for a year or two once he’s done with the energy reform in Mexico.  Brazil is not tackling their issues.  They are hoping that China will just get really hot again and buy all of their commodities exports and they can put off their issues for a while longer.  That’s just not a viable long-term solution. That’s why you see these structural problems in Brazil, while Mexico on the other hand is attacking theirs head on.  That’s why I’m so bullish on Mexico.  It takes a while for GDP growth and direct foreign investment or new investment to flow back in and new growth to come out based on the reforms that are put in place.  I believe Mexico has a brighter future because of some of their reforms.

Mexico’s tax reform has been enormously  criticised, however.  The problem is if you reform companies like Pemex along the lines that Peña Nieto is trying to do, the government is going to receive less tax income from Pemex and they need to levy more tax income on the private sector, which pays one of the lowest tax rates in all of Latin America and has one of the highest tax evasion rates.  There is some question on how that could impact the economy or might be impacting the economy currently.  But I believe that Peña Nieto is doing the right thing and that growth will come because of his initiatives.

Boyden: Compared to five years ago, do you see security and risk mitigation as having improved overall in Brazil and Mexico, or is it relatively the same? Also, what can be learned from Colombia in this regard?

Holder: Brazil and Mexico are in similar positions in terms of public insecurity. Mexico has gotten significantly worse in the last decade.  After the drug cartel transferred their headquarters from Colombia to Mexico, Mexico has had a terrible problem. You have a terrible insecurity problem on both the Mexican and US borders, with a lot of violence, organised crime with cartels fighting for territory and the government fighting with them and money laundering.

On top of that obviously Mexico has some significant work that needs to be done in terms of making its police and judiciary more effective to cope with public insecurity. In fact, crime in Mexico has gotten significantly worse over the last decade, but has stabilised in the last three years since Calderón unleashed his war on the cartels.  

Brazil has been pretty bad all throughout this period, but the interesting phenomenon is what’s happening inside the country.  For a time, the two big cities in the southern part of the country that have real problems with public insecurity, Rio and São Paulo, were getting better.  They were improving - Rio because they did a pacification programme of the favelas and São Paolo because they just really put a lot of money into policing and trying to lower violent crime rates. 

However, while that was happening, at the same time the northeastern cities started becoming much more violent than they were before.  Recife, which is one of the biggest cities in the northeast, sort of exploded in terms of criminality compared to before.

Boyden: Latin American companies and multilatinas  are expanding in the region and globally, including Anheuser-Busch InBev, Burger King and LAN. How and in what sectors do you see this expanding?

Holder: Twenty years ago, when I was working in the region, almost everything we did was oriented towards capital flowing north to south exclusively.  As the region grew and more capital started coming in, it started getting a little more east to west.  Before, the capital mostly came in from the US and Canada but during the 90s, more and more capital came in from Europe. Then the economy started booming and in the last decade, particularly the last five years, a number of very large Latin American companies have gone on global acquisition sprees.  We’ve seen a significant flow of money going south to north.  

You are also seeing a very big east to west capital movement with Asia as well.  The biggest investor in Latin America today is China.  It’s not the United States anymore and it’s not Europe.  China is the biggest trading partner with several of the bigger countries in Latin America, and some of them are bigger trading partners with each other than they are with the US.  One key conclusion of this story is the waning influence of the US in the region and the increased importance of Asia and particularly China in the region.

The second conclusion would be that companies are getting big enough and have access to enough capital down in Latin America that they are now buying companies up in the US.  The big ones that we can talk about, for example, is JBS, the big Brazilian meat packer that now owns most of the meat production in the US. The Brazilian funds bought Heinz together with Warren Buffet.  They bought Burger King too.  Vale is all over Africa in addition to other places.  In Mexico, you’ve got Televisa and CEMEX buying cement plants all over the world including the US.  

There’s a whole class of multibillion dollar revenue and market cap sized private or publicly held companies that are going out and expanding all over the world.  That is a new phenomenon and it will continue. The pace will probably pick up as the capital markets grow.  

Boyden: For decades Latin Americans have had to manage under pressure and often in crisis. From a global perspective, what can be learned from Latin American managers?

Holder: Clearly nobody else in the world has the experience that a Latin American manager will have in terms of running a company under crisis and managing through the uncertainty, unpredictability and tremendous growth curves that you face in economies that are just growing so fast, and there is such a pent-up need and demand for such managers.  If you have a business that you want to grow aggressively or that you think is going to enter choppy waters, I can’t think of a better manager to have than someone who grew up in Latin America.  You tell them you are going to have 4% annual inflation, 3% GDP growth, 2% interest rate and to run with it and they can’t believe it. They’ve never had that to work with in their whole life.  

Instead, they are used to inflation probably being 1,000%, having no access to capital except for what you can generate yourself, being unsure of whether you’re going to be paying the same taxes three months from now as you are now, and being unsure  if you are even going to be able to source the materials you need.  Now go.  It’s a profound difference.  

A Latin American executive probably won’t play well if you want a manager that’s just going to be a caretaker of a mature business and who is going to try to squeeze pennies worth of value out of it.  That’s probably not the best use of someone who grew up in an environment like this.  Any troubled business or market environment, any strong growth curve environment or anything else that requires calm under fire, creativity, vision and analytical skills, Latin Americans are your people.

Boyden: Will we start to see more Latin American execs being recruited to roles outside the region?

Holder: We already are.  There are a number of Fortune 100 companies that have Latin Americans as CEOs, COOs and CFOs. It’s already happening.

Boyden: How would you describe your management style? 

Holder: I would say that I am a hands-off kind of manager.  I like to give my team the ability to make their own decisions and their own mistakes, if they are going to make a mistake, and take a mandate and move forward with it.  I am not a micro manager.  I will allow people to have their freedom  and I will allow them to do the things they need to do.  I try to be more of an advisor to them.  I am very clear however on what the objectives are.  I’ll sit them down and say this is what is expected.  We’ll come to an agreement and I will hold them to that.  

Read the full interview

 

The Evolving Global Risk Landscape: Moving Beyond Bubbles


In the aftermath of the “Great Financial Crisis,” there remains concern about speculative bubbles which may pose a systemic threat to the global recovery. How can we identify and prevent the formation of financial bubbles in the future? What types of regulatory reforms are most effective in helping consumers and investors better protect themselves from excessive exposure to risks and corrections in the market? Going forward, what lessons can be taken from the subprime mortgage and sovereign debt crises in the U.S. and Europe, respectively?


Moderator
Frank L. Holder, Chairman, Latin American Region, FTI Consulting

 

Speakers
T. Timothy Ryan, Jr., Global Head, Regulatory Strategy and Policy, JPMorgan Chase & Co.
Raimund Röseler, Chief Executive Director Banking Supervision, Federal Financial Supervisory Authority (BaFin), Germany
Warren Jestin, Senior Vice-President and Chief Economist, Scotiabank
Nicholas Sargen, Chief Investment Officer, Western & Southern Financial Group
Sam Stovall, Chief Equity Strategist, S&P Capital IQ, and Chairman, S&P Investment Policy Committee

Connect with Frank Holder