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Geopolitical Risk: Businesses Need to Respond

 8 min read / 

Companies shape geopolitics which, in turn, affects companies. From the interests of the East India Company in the 18th and 19th centuries to United Fruit in the 20th, and to Saudi Aramco in the 21st, it has always been thus. In times of increasingly tight commercial networks, of increasingly interconnected economic and social nodes, doing business involves a continuous participation in international dynamics. This is tru for all companies, even the smallest.

Jean-Marc de Leersnyder, professor of International Marketing at the Ecole des Hautes Etudes Commerciales (HEC) in Paris, wrote in his article Corporate Culture and Geopolitics that: 

“Geopolitics represents a privileged field for leading public players (the States themselves, government bodies, international organisations) and other bodies from the non-profit sector (NGOs). In the modern world, business has become one of the biggest contributors to geopolitics. Corporate strategy is developed within what is now a reconfigured space. This reconfiguration is the result of three factors: the geopolitical situation, globalisation and the behaviour and conduct of international corporations themselves.”

Geopolitical Risk in Politics and Economics

The concept of risk is broad and rather undefined. For some sectors, it is an integral part of the game (think, for example, insurance and finance) while for others it represents almost the denial of order and prosperity (think of the dossiers managed by the ministers of the Interior or of the Defense).

Traditional geopolitical and state risks are identified in conflicts between governments focused on issues of sovereignty. A second category is characterised by geo-economic risks that are not easily visible, due to strong interdependence and contagion effects, such as the phenomenon that caused the systemic crisis beginning in 2008, starting from the financial sector and toxic mortgages in the United States.

Entrepreneurs and managers are sometimes accused of lacking a strategic vision of the political and public world, but on the other hand developing strategic thinking is precisely the privileged role of political authorities (or should be). The democratic process, however, subjects political leaders to conflicting pressures: on the one hand voters trust in the ability of political elites to look at the common good in a forward-looking way, but on the other hand they demand pragmatic and rapid solutions to the major problems of the moment, punishing subsequent elections if the politicians failed to meet their expectations.

However, the same volatility of risk can be an opportunity, at least when an unstable or unbalanced situation creates the space for action to position business in view of the future. Taking the initiative in a period of high volatility is a classic form of investment. In fact, business lives in uncertainty because it is precisely on risk that the profit is built; politics has another attitude and tends to perceive risk – at least at the level of public communication – as a necessarily negative phenomenon.

Given the many divergences between economics and politics, there is, however, a meeting point: the time factor. In many cases, introducing a change or launching a reform process is risky and expensive in the short term, but reduces some risks in the medium and long-term. It is, therefore, a question of defining the best trade-off between risks of a different type.

In a nutshell, the disorder is not in itself a danger to the economic world, but a sort of underlying condition that is discounted in the calculations and projections. Rather, the problem lies in the relationship between the logic of economic profit and that of political planning since the latter must protect wider interests than economic advantage alone, and must do so through the instruments of consent expressed by the vote.

Contemporary societies, even in countries that are less integrated into the great flows of global interdependence, are exposed to many risks. It is, therefore, appropriate to reflect on the fact that an excessive divergence between economic and political dynamics creates a real additional risk, namely the loss of a crucial channel of transmission between ordinary citizens and large concentrations of power. It is a risk that can be mitigated by a constant confrontation between institutions, large multinational companies, SME entrepreneurs more rooted in a given territory and various intermediary institutions. It is an increasingly important cultural and intellectual need in the contemporary world.

This was also highlighted at the World Economic Forum 2018 held in Davos, Switzerland. The KPMG auditing firm highlighted indeed that, through a survey conducted with 1,300 CEOs, geopolitical risk has risen to the top of their concerns and encourages managers to seek answers.

KPMG and Eurasia Group

Starting from 2014, following moments of severe crisis, the main risk factors have assumed a geopolitical nature: think of the implosion of the Middle East, Euroscepticism, the instability of political systems, etc. For this reason, this category of events is destined to take on a comparable, if not even greater, importance than that deriving from the performance indicators that measure the health of companies.

Based on this belief, the report The CEO as Chief Geopolitical Officer was published jointly by Eurasia Group and KPMG International in March 2018. This report explains that only by shifting the policy to the forefront of the strategy, a CEO can adequately guide current global companies. This way of thinking begins with the acceptance that global societies are considered political entities and the managing directors are political actors. Therefore, CEOs are given the task of personally performing the role of Chief Geopolitical Officer (CGO), using stress testing tools and focusing the company’s attention on managing an increasingly uncertain environment.

Exposure to political instability can be particularly pronounced for companies that expand into frontier and emerging countries with potentially weaker political institutions, with civil or low stability disorders. At the same time, the most developed markets, previously considered stable, can also become turbulent due to the rise, for instance, of populism, nationalism or attention on their nation in approaches to international trade.

Many companies are larger economic entities with potentially greater influence than the countries in which they operate. According to an estimate conducted by Global Justice Now in 2016, 69 of the 100 richest economic entities were companies, not countries. The study also showed that the top 10 companies in the world – a list that includes Apple, Walmart and Shell – have a combined turnover of over 180 countries combined (the list includes countries like Ireland, Indonesia, Israel, Colombia, Greece, South Africa, Iraq and Vietnam).

Hence it is necessary that the role of CGO has to be done personally by the CEO. In the past, having a dedicated public affairs team was in itself a sufficient answer but now that can only be treated as the beginning. Covering the role of CGO means that CEOs must be willing to be the face of public relations instead of delegating public commitments to a team, with acts that can be for example holding meetings with public officials or being visible on social media.

One way to manage exposure to geopolitical developments is to conduct stress tests on the strategy and planned initiatives. For example, if it is assumed that there will be global disruption of transport and communication networks (a likely scenario at a time of strong geopolitical tension), virtually all companies would be seriously affected. A stress test could help assess the impact of such disruption. A CEO could take a company’s three-year business plan and model the scenarios to get an idea of their exposure and resilience by considering three areas: financial, commercial and operational.

A regular understanding of geopolitical risks and opportunities is now essential for business resilience. Perhaps more importantly, businesses should aim to develop appropriate responses or contingency plans for different scenarios and incorporate them into their strategy.

Likewise, it is not just the geopolitical environment that needs to be monitored. It is becoming increasingly important for companies to understand and truly know not only their customers but also the other stakeholders that influence their business.

To conclude with the words of Professor Leersnyder:

“[T]he commercial sphere is not separate to the political one. Geopolitics is the result of the games played out by all the leading players on the international scene. On this stage, neither states nor businesses can expect to play alone”. In other words, companies and states are like two actors playing on the same stage, but often with different scripts. Two different cultures that must, however, be integrated in order not to disintegrate everything.”

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