Forum for Innovation

Over the past decade, companies have wrestled with the onset of war, the shock of terrorism, and the rise of global cybercrime.  As businesses continue to expand into more developed markets, these systemic shocks will take on greater importance even as they become less predictable.  As a resul, political risk, or the threat that political events will undermine a company’s bottom line, should be taking on greater importance to multinational companies.  

Except that hasn’t always been the case.  Assessing this sort of risk is often a subjective exercise at best; at worst, it is an attempt to embed ideology into corporate strategy.  As Ian Bremmer, a noted political risk expert and founder of The Eurasia Group, said, “Too many corporations and organizations ignore political risks until it is too late.”  

That’s why a clear-headed approach is needed and why a certain passage stuck out to me recently:

“Geopolitical risk has a clear meaning for business: It is the potential for international political conflict to threaten the financial and operational stability of companies around the world. To develop a framework to mitigate this risk, MNCs [multinational corporations] must understand the specific nature of the relationship between corporate globalization and geopolitics, map the ‘sites of risk’ for corporations in their activities, and adopt forecasting tools to enhance their enterprise resilience with respect to threats from conflict and terrorism. CEO leadership is crucial to advancing this process.”

This quote comes from an article in Booz Allen Hamilton’s Strategy + Business magazine called “Risky Business: Geopolitics and the Global Corporation.”  The article, authored by Sven Behrendt and Parag Khanna, argues that “to remain a global player today, a firm must be able to survive not only economic downturns, but also geopolitical shocks.”

Firms need to analyze their risk from 7 different angles:

1. Presence in emerging and unstable markets 
2. Distribution of personnel, especially in unstable locations
3. Physical exposure of the headquarters, especially if it is centralized
4. Supply chain and partnerships, primarily across insecure borders
5. Presence in markets that are vulnerable to geopolitical shocks
6. Capital hazard from volatile investments subject to political whims
7. Information vulnerability to cybercrime, communication errors or blockages

After analyzing risk, what then?  The authors argue for comprehensive, systemic risk analysis to be personally integrated by the CEO into the entire company, from its mission on down to its operations.  Scenario planning also seems to be helpful, though the author cautions that “firms must be prepared for all possible outcomes and ensure that flexible strategies can be implemented across the spectrum of risks and futures.”  Finally, governments and companies should recognize that they have an incentive to work together in analyzing and mitigating risk.

Addressing political risk may ultimately mean wrestling with the role of companies in the political and social spheres as well as the function of the market in global governance.  Companies can cause political instability just as much as they are vulnerable to it.  As such, the authors believe that corporate citizenship and political risk should go hand-in-hand if global firms want to proactively deal with risk.

Being active in today’s marketplace can be risky business.  With a little bit of foresight and a lot of planning, companies can become more resilient to the risks of politics.