Global businesses can proactively handle the risks that growing international and domestic political tensions pose to their operations, performance, and culture. The story contains how to manage geopolitical risks for your business safety. Companies are treading water in a geopolitical quagmire as political tensions inside and between areas worsen the chances of affecting a global enterprise’s operations, performance, or personnel increase.
Geopolitical dangers will exacerbate the problems they cause. Competition for global influence is set to reach a new high in the coming two decades, surpassing the Cold War. One of the findings in the US National Intelligence Council’s report Global Trends 2040: A More Controversial World is this. According to the research, no single region or domain is expected to dominate the others, and “a broader range of actors will compete to advance their ideologies, goals, and interests.”
The ongoing battle between China and the United States is a perfect example of the consequences of present geopolitical tensions. Seventy-six of the world’s top 100 corporations are based in the two countries. Many multinational firms are pursuing their type of “strategic autonomy” to negotiate China-US relations, drawing on policy discussions in the European Union. Technology, in particular, has become the “primary battleground of global power conflict,” according to Chinese President Xi Jinping. Companies must evaluate how to take advantage of capabilities like 5G and AI without risking regulatory or reputational repercussions due to geopolitical tensions.
Internal pressures are exerted on company leaders due to such external constraints. For example, a company’s leaders may have to assess the impact of governmental or media scrutiny on its operations in one area on its holdings in other areas, depending on the circumstances. Given the hazards, they may need to balance short- and long-term market interests. They may also have to deal with a global workforce with opposing viewpoints on data privacy and human rights.
Any discussion of such potentially vital matters must begin at the very beginning. After speaking with senior business leaders and legal, public policy, and risk professionals from organizations across diverse industries, we propose a five-pronged strategy to manage geopolitical risk.
1. Start With The Board
Many corporate boards have already considered geopolitical concerns to some extent. However, the conversations frequently center on a single investment, project, market entry, or exit. As a result, they overlook the larger strategic environment, the whole spectrum of risk scenarios and repercussions, and critical decision points.
Instead, as part of a larger board effort to build more resilient organizations, boards can devote regular standing time to studying how to respond to their companies’ geopolitical risks. It would be folly not to engage in such debates in the current geopolitical situation.
Assessing the risks that matter the most to an organization is starting a more strategic approach. The board of directors can use a materiality test to determine what it should spend time addressing. The Iran nuclear discussions, for example, have far-reaching regional and global implications. However, if the talks do not directly impact its operations, the board may not need to devote time to them. On the other hand, most multinational corporations regularly deal with various localized geopolitical concerns. These dangers could include securing operations and personnel in the face of political unrest, ensuring compliance with changing local legislation in one market, and staying on top of human-rights concerns in another.
The strategic competition between China and the United States will remain at the top of their list of ongoing risk concerns for many businesses. A board could start such a discussion by conducting a baseline evaluation, which would comprise the following:
- How we got here: historical context of China-US relations
- Where we are now: knowns and unknowns
- Where we are headed: key watchpoints to track—four likely candidates are human rights and domestic politics; other governments’ positions on relevant policy and trade issues; strategic flashpoints, such as Taiwan; and trade and technology.
- What to do about it: implications of the analysis and how to prioritize decisions about actions based on them.
Boards can obtain perspective by asking business and political leaders, embassies and other government agencies, and nonprofit organizations for their thoughts on pertinent matters. Your risk taking an overly restricted or insular approach if you don’t examine outside perspectives.
Providing a regular forum for a board of directors to examine pressure points and operating realities from multiple perspectives and air divergent viewpoints not only improves decision-making and establishes an organization’s appetite for risk, but it also aids in the creation of consensus across leadership on current issues. When risk scenarios play out, such a consensus may produce a set of guiding principles—and, more significantly, a stage of trust-based relationships and mutual understanding across the organization—enabling rapid, intentional response centered in a standard set of goals.
Providing a frequent venue for a board to analyze pressure points and operating realities from many perspectives and air divergent viewpoints helps generate consensus across leadership on the challenges.
2. Use a trifocal lens to assess potential risks
Organizations can be ready to respond to geopolitical hazards over a long period. Developing short-, mid-, and long-term reaction strategies guarantees that a business can deal with a rapidly changing situation or emergency and make the necessary investments to grasp opportunities and become more resilient.
Short-term actions
Establishing a crisis-response team to take the lead on detecting potential hazards and devising mitigation methods is one short-term move that a corporation may take. For example, such a team could examine political developments that threaten to materially disrupt the company’s operations or prepare responses to government inquiries into sensitive areas.
Another short-term strategy is to invest in the process, public relations, and government relations teams that can operate as the company’s primary point of contact with top government officials and important stakeholders across several jurisdictions. The units can use their relationships with officials to communicate their viewpoints on essential subjects and learn about future regulatory actions or punishments that may affect them.
Midterm actions
A critical midterm activity is regular briefing sessions with a company’s board and top leaders on pertinent geopolitical issues. High-level stakeholders can discuss the company’s possible risks and examine ongoing mitigation actions during these sessions. Brand and reputation; operational challenges, such as cyber security strategy; and goods, services, and partnerships are three risk categories that might be discussed.
Long-term actions
A corporation can perform exercises to assess its response to game-changing scenarios as part of its long-term strategy. For example, one test might look into the possibility of the company being forced to ring-fence its IT infrastructure (to protect against cyberattacks or meet regulatory requirements) or split off its business in a particular region. A time frame for execution and possible technological options would be included in such a test.
Long-term planning can also cover such issues as the following:
- The most significant opportunities and challenges created by a constantly evolving geopolitical landscape and the investments or adjustments needed to address them
- Potential unintended consequences from taking a particular risk position
- Key takeaways from how peer companies responded to similar shock situations
3. Think critically about the corporate narrative
Walking a geopolitical tightrope may drive executives to rethink how they think about and position their firms for internal and external stakeholders. For example, some corporations may prefer to strengthen relations with their home countries for commercial and strategic reasons. Others may identify as global entities because it gives them access to emerging market business prospects. However, in the age of quick knowledge, a company’s tale about itself in one market will not last. And a story that works in one place may stifle commercial prospects in another or create regional sensitivities.
Consider the repercussions of a company’s entire story as part of managing geopolitical risk. Consider the trade-offs of framing how the company talks about itself in a certain way, whether or not that story may cause conflicts with external or internal stakeholders and the potential solutions.
Consider the repercussions of a company’s entire story as part of managing geopolitical risk. Consider the trade-offs of structuring how the company communicates about itself, if that story may cause stakeholder disputes and the potential remedies.
4. Deploy refreshed risk frameworks and guidelines
Companies can construct market-specific evaluations or “compacts” that combine business strategy and risk management if they operate in high-risk areas due to political instability or the prospect of international sanctions. A high-risk market compact should spell out an organization’s priorities, the criteria to be used to assess and manage risks, and how to apply the requirements in a way that aligns with operational and performance goals. Financial, safety-related, legal, political, or reputational risks must be considered.
A compact could have a traffic-light-style warning system, with red, yellow, and green lights indicating growing risk levels. The warning system could be used by a corporation in the industries in which it operates. It might also apply the method to the companies with whom it does business, dividing those with whom a local office can deal without further approval from those with whom it must obtain risk approval and those with whom it should never do business.
Before determining what to include in market compacts, companies may want to obtain internal and external viewpoints. For example, they could turn to embassies, international financial institutions, nonprofit organizations, and peer organizations for information or guidance. Cultivating a local risk-management network with key stakeholders and sources with knowledge on critical themes can also assist an organization in maintaining a high level of situational awareness.
Compacts offer strategic advice on engaging within a country—understanding how to cope with cross-border challenges for prudent geopolitical risk management. As a result, a corporation may need to provide advice on various matters, such as conveying geopolitically sensitive themes appropriately in publications or speeches and showing contested borders on maps.
5. Secure stakeholders’ hearts and minds
Geopolitics is a very personal subject. Stakeholders in a large corporation are likely to have different cultural perspectives and ideas on human rights and privacy. Disagreements about risk and strategy can arise as a result of these discrepancies. In addition, people may be concerned that a corporation will adhere to different standards in different parts of the world. Such circumstances are expected to worsen in a world where nationalistic sentiments are rising, no country dominates, and norms and standards are fragmenting.
It’s up to leaders to knit a global organization’s fabric so that it can withstand the rips that growing pressures threaten to cause. Leaders can foster unity by bringing key stakeholders to the table to offer their perspectives on a particular engagement or project. Ensuring that all affected geographic regions are represented in such conversations is critical. Internal cracks can otherwise emerge and rupture, causing damage to the company’s culture, reputation, and performance.
“Only the paranoid survive,” former Intel CEO Andy Grove famously said. Companies must be cautious as tectonic upheavals in geopolitics rumble from China’s reemergence on the global stage, a climate crisis, and the Fourth Industrial Revolution. They should take a break from tending to the immediate requirements of their operational surroundings frequently to learn, adapt, and prepare for external and internal shocks and pressures.
In conclusion, international relations and diplomacy collide with law, finance, economics, criminology, and other fields of study, including geography and geopolitics, in the realm of business risk. Yet, all of these points of view and the geopolitical implications of international sanctions, transnational organized crime, and other sorts of business hazards are taken into account by the most robust compliance systems. This enables a more comprehensive, holistic understanding of the numerous and complicated factors that underpin these dangers, allowing them to be adequately analyzed and controlled before they become a big regulatory or reputational issue for your company.
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