How to Bungle Political Risks

A survey finds that most senior executives consider overseas perils a low priority, even when they have investments and operations abroad.

AES Corporation’s 1998 purchase of Telasi, the nation of Georgia’s electricity-distribution company, entailed the myriad of political risks that most international businesses deals do. But the venture resulted in one catastrophe that could not have been anticipated: the murder of AES-Telasi’s CFO, Niko Lominadze, in 2002.

Why the finance chief had been shot dead in his Tbilisi apartment by a policeman’s gun remains murky nearly four years after the crime. Although the police officer whose gun was identified as the murder weapon was arrested shortly after the killing, he was released a few months later. Recently, however, five people, including a local gas industry executive, were arrested in connection with the murder, according to a Caucasus Press story cited by the EurasiaNet website. Georgia’s Interior Minister said in March that the goal of the person who hired Lominadze’s killer was to prevent the discovery of an embezzlement scam within AES-Telasi, according to EurasiaNet.

Indeed, AES’s handling of its political risks in the country in the years leading up to the crime appears to have been an object lesson in how to make a hash of them. The company’s foray into Georgia “was just like Vietnam,” an AES manager told Witold Henisz, a professor at the University of Pennsylvania’s Wharton School. “We were the big, bad Americans—completely naïve, did not understand consumers or the government, and thought we could come in and everything would work,” he said. Henisz, who is also a principal in PRIMA LLC, a political risk management consulting firm, declined to name the manager. AES Corporation did not respond to a request for comment.

The electrical-power giant’s experience in forming AES-Telasi in Georgia, however, went through fluctuations in the company’s attempts to manage its reputation and address concerns of government officials, consumers, and other groups, according to a case study co-written by Henisz and Bennet Zelner, a visiting assistant professor at the University of California at Berkeley’s Haas School of Business. To start with, AES encountered a poor, widely corrupt country with little energy infrastructure and a population that was unfamiliar with paying for electricity, the professors report.

Still, things began fairly well. Until 2001, Mike Scholey, head of AES-Telasi, initiated significant investment in the company, battled against corruption, and launched a high-profile public relations campaign. The approach resulted in higher bill collections and an improving public opinion of the company.

After the fall of 2001, however, the company fared much worse under its new leader, Ignacio Iribarren. His hand forced by headquarters’ pressures and the post-Enron environment, Iribarren focused heavily on improving the company’s financial results, targeted non-paying industrial consumers, and suspended new investments and public relations activities, according to the case study.

The ensuing problems that resulted from this approach included a Parliament investigation into AES-Telasi, lawsuit threats, and the cutoff of power to government organizations — in short, a loss of public and government support for the company, the authors say. The company ultimately sold its operations in Georgia, resulting in a $300 million loss to AES shareholders.

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