Introduction

Leading and governing a global business in a rapidly evolving, interconnected web of markets is an extremely difficult task for any board to do well; add to that the challenge of doing so in an increasingly uncertain and, at times, chaotic geopolitical environment adds a level of complexity that few business leaders or board members appreciate. Traditional methods of treating political risk as a transactional and reactive topic are worse than inappropriate—they provide a false sense of security in a global economy whipsawed by political changes. Firms fail to realize that they lack the data or expertise to have conversations about the impact that global affairs has on their business to the same degree of seriousness that they can about financial or workforce issues. Therefore, this chapter sets out to demystify the topic such that it can rise to an intelligible level for executives, and proposes a comprehensive site framework for the regular treatment of politics in the boardroom.

Most businesses have grown comfortable navigating the interconnected global marketplace brought on by increasing trade and technological advances of recent decades. Corporate leaders understand that an economic cool-down in one part of the globe can affect their performance in another and that gaining foresight about those events can allow for more effective planning and competitive benefit. Such processes are embedded within the business and rise to board level discussion when relevant.

Yet rarely do firms orient their lenses to recognize that geopolitics is driving much of the economic volatility. In effect, they are reacting to symptoms rather than proactively tracking the evolution of events that create volatility in the environment in which they operate. Boards that fail to ensure that their companies are adequately positioned to navigate political turbulence fail at a core governance responsibility.

Companies must increasingly recognize that—for many industries—the biggest external risks they face are driven by political events. It is a director's responsibility to be looking ahead and see what the operators do not see. As a result, the board—as steward of the enterprise responsible for delivering governance—has a core mandate to make sure that management has a firm grip on how events will unfold and impact their business.

Most companies fail to do this adequately. As Lord Mark Malloch-Brown, who sits on numerous global boards put it (Personal interview, 2019): “Modern geopolitics is an unwieldy issue which boards find hard to put adequate process around—they veer from casual golf course–like nineteenth-hole discussions to overly dry, risk dashboard ways of looking at it. It's hard to find something in the middle—which is a dynamic and informed way to discuss politics that keeps it focused on the issues most relevant for that particular business.” Herein, we attempt to propose that optimal approach.

Twenty-First-Century Political Risk

For much of the last 20 years, companies doing business overseas focused primarily on country-level risk. That lens of analysis was easy enough for boards to digest because the implication was that country factors could impact national businesses, so a box could be put around issues for consideration. If you were an American company doing business in say, Turkey, the set of political, economic, and security factors you would consider in determining the country's attractiveness would have been largely locally contained and relatively easy to define. As one of the investors who poured into Turkey during the period of political and economic reform at the turn of the century, you would have had a reasonably short list of issues to understand and monitor. The primary geopolitical consideration would have been Turkey's relationship with the EU and prospects for its accession to the bloc. In effect, firms could have confidence that a system of global leadership institutions, alliances, commercial relationships, and increasingly convergent rules would provide a backdrop for political events to remain within a certain range of outcomes. So, firms could reasonably assume that Turkey and its Western allies in the North Atlantic Treaty Organisation (NATO) would be highly coordinated, especially in the wake of any external threats.

Of course from time to time, tensions could flair between countries in a way that would embroil business; it would, however, often emerge after a slow burn—giving businesses time to react—and it would be contained by the global architecture, one which rich countries wanted to safeguard and emerging countries wanted to access.

Yet, the nature of risk has changed materially. Long-gone are the days when the G20 group of nations agreed together to limit the carnage of the 2008 global financial crisis by committing to avoid beggar-thy-neighbor trade policies and flooding the global economy with somewhat coordinated stimulus. As Eurasia Group President Ian Bremmer puts it, today's world is characterized by a “G-Zero”—a world without clear global leadership—where global crises are met with nationally maximizing approaches.

As a result, if you are an American company operating in Turkey today, you're facing a political, economic, and security environment that is shaped to a far greater degree by wider geopolitical factors—and they're mostly trending negatively. In order to assess the continued viability of your presence as a global company in the Turkish market, you would have to take a view, for example, on the implications of the country's military alliance with Russia—necessary to achieve many of President Erdogan's objectives—and the resultant economic and security blowback from the United States and NATO allies. You would also have to consider the increasingly strained relationship between Turkey and the EU following the 2015 migrant crisis—itself rooted in geopolitics—and the implications for your ability to fully access the EU market through Turkey. And then there's the question of the humanitarian crisis in Syria—driven by regional and global proxy powers—and its implications for keeping your operations and people in Turkey safe.

Moreover, the impact of decades of rising inequality in the Western world has led to populist politicians on both ends of the spectrum rising to power at a time when revisionist leaders occupy the halls of power in countries like Russia. Far from a world where international organizations are a source of stability, the world is now asking questions about whether institutions like the European Union will exist 20—or even 5—years from now. Security alliances like NATO, which prevented military incursions into economically attractive markets, are now fraying. And countries like China are becoming much more aggressive in asserting their role as global powers than in prior years when lifting its population from poverty as the “workshop of the world” was enough.

The reason that populist politics can be so destabilizing for companies is that they tend to run counter to basic economic assumptions that underpin the global capitalist system. For example, the idea that countries should specialize in producing goods and services in which they have a competitive advantage and trade with other countries for mutual benefit is the underpinning of global trade. Similarly, the notion that people should be free to move across boundaries to deploy their skills for maximum personal and societal gain is a central feature of the knowledge-based economy.

So when the world's biggest economy (U.S.) starts a trade war with the second biggest economy (China), or when the UK threatens to restrict the flow of skilled migrants from Europe post-Brexit, companies have to cope with a materially altered business environment. They have to cope not just with the immediate fallout such as reorganizing supply chains, but relook at fundamental assumptions that go to the core of their business and operating models.

Worse yet, this dynamic leads to core business decisions becoming politicized. How could a company be wrong to implement a technology designed in the emerging world that is just as good at its core function for a fraction of the price? Simple: if that company's home country is embroiled in a technology cold war that makes the company itself an attractive target for untoward intrusion. How could a company be singled out by its national president for being unpatriotic just because it maintains part of its production base in a low-cost neighboring country? Simple: if the company's home country is intent on upending trade relationships to achieve country-first deals and needs visible wins from companies “bringing jobs back home.” After the U.S. government banned firms from doing business with Huawei, even though many companies were subsequently covered by a temporary exemption, many nonetheless opted to maintain the break entirely rather than remain exposed to such a highly politicized issue.

This type of environment is extremely hard for companies to navigate. Today's world is not just volatile and complex, but also moves at the speed of a technologically integrated network. A tweet from a politician can lead to backlash on the other side of the world in a matter of minutes. Corporations don't get the time to react in the way they're used to—and the odds they become embroiled in political spats are increasing.

The picture is further complicated by rising anti-business sentiment as antiestablishment populism spreads across the Western world: A 2017 study by EY on the UK found that only 33 percent of the population trusts business (https://www.ey.com/Publication/vwLUAssets/EY-politics-populism-and-trust-in-business/$FILE/EY-Politics-populism-and-trust-in-business.pdf). In such a context, even when companies are able to react to political developments, they may find their influence diminished. It may therefore not be sufficient to presume a strong government relations function is the best defense.

Take, for instance, companies that rushed into both Iran and Myanmar as U.S.-led global sanctions were lifted. The markets were attractive for very different reasons, and the urgency to establish a foothold proved ill-advised for different reasons, too. In the former, businesses ignored the likelihood that the United States would rip up a nuclear pact that enabled them to do business in Iran. What they should have done was adequately discount that likelihood but be ready to disengage swiftly. Similarly, with Myanmar, companies rushed in to gain competitive advantage. But they failed to understand the domestic situation and the difficulty they would find operating within it, especially once the Rohingya crisis exploded into the international public's awareness and these companies experienced backlash in popular opinion.

This environment can also be the source of advantage for many companies, but only if they understand how politics can put a wind in their sails. Companies that correctly integrate political risk discounting into asset price analysis—combined with forecasts about the future—can gain from being acquisitive in places that are set to get better. This can be from a domestic perspective—as in the case of companies that bet India would become more business-friendly if Narendra Modi came to power. Or it can be from an international perspective—such as companies that correctly bet on reforms in Vietnam motivated by the Trans-Pacific Partnership trade negotiations, regardless of whether the deal would ever be ratified.

Politics Is More Manageable Now Than Ever

Part of the reason that companies have such a tough time navigating this environment is that they don't recognize that they can equip themselves to succeed. As recently as ten years ago, it was difficult to get credible information in many emerging markets to form the basis for decision-making. As a result, companies relied on their national business units to tell them about the countries in which they were operating. In a pre–Google News and pre–social media world, a company having boots on the ground in Kenya probably had as good a chance of understanding what was happening in Kenya as any. But that's changed.

First, as argued above, the core risks facing multinationals are no longer just at the country level. That means companies need integrated efforts to draw linkages between the information they do collect, in order to form a theory of what's going on in the world and why/how that is specifically relevant to their company.

Second, the amount of data that is available today gives companies the ability to really understand what's going on in the places in which they operate. Smart companies not only can use big data collection methods to gather information about where they are doing business, but they can use natural language processing and sentiment analysis of local-language news to anticipate if they will have a political issue and they can use artificial intelligence to better model eventualities and assess their vulnerabilities.

Third, companies often don't see politics as a source of advantage, for instance 11 percent of S&P 500 firms have a risk committee, and only 7 percent of S&P 500 firms have a public policy and regulatory affairs committee. So they push all analysis into the risk realm. When the political world feels like a minefield, companies can sometimes feel like they can't step anywhere. That's exactly when opportunities can open up in markets where political risk is overpriced by those less able to discern what's really going on. And so a full understanding of the political landscape can give companies competitive advantage that should be understood in strategy discussions.

Politics Is a Board Imperative

The preceding discussion has focused on how companies should understand the world around them. But what's the role of the board in assessing and overseeing such issues?

In short, the board has an imperative to make sure that the company it sits atop of is prepared. Are executives adequately integrating political information into their strategies? Does the company have an effective handle on how global events will affect their various businesses? Are risks and opportunities being equally weighted in discussions about politics?

In some ways, this is no different than board-level responsibilities that have emerged around cybersecurity risk or environmental, social, and governance (ESG) risks. Like cyber and ESG, politics is amorphous, complex, and dynamic—but also existentially important. However, unlike cyber and ESG, politics is rarely addressed formally.

As Juan Pujadas (Retired principal of PricewaterhouseCoopers, Personal interview, 2019) noted, “The risks and opportunities inherent in a globally interconnected economy are driven substantially by macro and micro politics. But these are often discussed in very specific, almost transactional, situations. Other less traditional, but equally impactful, risks like exposure to cyber-attacks rank higher on the agenda of boards. Perhaps because of regulatory expectations, compliance requirements or some aspects of the broader social agenda, cyber and ESG rank high on the agenda and geopolitics rank low.”

Lower priority means we're not fully at the beginning of history with respect to boards asking questions about global affairs. However, many of the current structures and approaches are outdated and misguided.

Part of this is driven by the fact that boards do not have to work on geopolitics in order to satisfy regulatory requirements or in a formal way that requires certification. Instead, geopolitics flows through business planning, performance, and review processes until it's an issue and then it may rise to board-level consideration as an ad-hoc agenda item. This approach is flawed primarily because it is not systematic and relies on the intuitive awareness of those involved in the business strategy, planning, and operations functions. This method of geopolitical analysis often results in less-than-absolute coverage of the most relevant political events, individuals, and factors facing the company, and therefore gaps emerge in the understanding within the company of the full spectrum of risks and opportunities created by geopolitics.

In addition, it's reasonably common to see boards look at the global situation in an annual review. While that's better than not doing it at all, the world no longer moves at a slow-enough pace to make this effective.

Second, geopolitics is the type of thing that invites a board member with no political experience to position as the in-house amateur expert—perhaps because they are senior business leaders who have some political access or simply because they are well traveled. As Lord Malloch-Brown (Personal interview, 2019) put it, “It's not uncommon to hear board members cite what they are hearing at the local pub in the instance of Brexit or the latest rumblings of the African National Congress in South Africa.” While a board member may quickly admit that they don't understand blockchain or need board colleagues with particular speciality in human resources or finance, they rarely feel the same about politics. Even when they do, boards will put a former government minister or politician on their board and assume that this solves the problem. Realistically, no single individual can be expert in the world, and the company imports that person's biases and deficiencies into their governance structure in such an approach.

Third, some boards will delegate the issue to a subcommittee that simply requires further reporting from government affairs functions. But those boards fail to recognize that because government affairs professionals are responsible for achieving outcomes, they are often too optimistic about their ability to change events for the betterment of the company and will favor a political strategy lens on the issue rather than an eye toward how politics impacts broader firm strategy. Moreover, forcing the issue into a subcommittee means that it's probably being tracked from a risk perspective but insights about upside can be lost.

A New Approach

There's a scenario where the level of chaos present in the geopolitical sphere today abates over the next five years. After all, some of the current strongman leaders will have ended their terms, populist governments could be elected out, and feelings of nationalism and tribalism could die down. In this scenario, for boards, the headache of politics as a risk in its own right and as a force multiplier of other risks could diminish.

But this is unlikely. The most fundamental reshaping of the global order—the rise of China and its geostrategic competition with the United States—will take decades to fully unfold. Global hegemony as a concept will wither, to be replaced with regional hegemony, and while the resulting reshaping of alliances and global institutions will be slow-moving, it will also be unpredictable. Around the world, establishment politics and mainstream parties are being decimated by new movements. The replacement orders will take time to establish and reveal their own set of characteristics. And existential threats like climate change will likely upend politics for decades to come.

These dynamics make it clear that geopolitical volatility is here to stay, and boards cannot simply wait-it-out. Some type of formalized process to deal with the business risks and opportunities from politics is now essential if boards are to manage risk appropriately. Some may choose to wait for formal guidance from regulators and oversight bodies to prescribe or recommend a process. Others may even decide that “political governance” is still an emerging field and wait for case studies/models to emerge from first-movers who trial-and-error different techniques. The timing of a board's action will depend on its general culture toward risk and proactivity, and the nature of the company's activities and footprint.

As Didier Cossin, founder and director of the IMD Global Board Center (Personal interview, 2019), told us: “The level of governance practice—even basic risk analysis of many boards is not high. First, they need to have decent risk analysis, identification of major risks and a risk map done at the board level. One third to half the organizations around the world are exposed to geopolitics. So, I would expect them to have a systematic approach to geopolitics for best-in-class governance.”

So the core prerequisite to good governance on geopolitics is strong risk analysis. But given that, what does a systematic approach look like? We propose the Four A's model—Anchor, Analyze, Assess, and Adjust.

Conclusion: The First Step to Geopolitical Governance

This chapter has outlined how boards are unprepared for the shifting geopolitical sands in which the companies they govern operate. It also outlines a framework for appropriate governance. But how should a company take the first step in getting a handle on this issue? As with all business challenges, the first step is an internal recognition that the problem exists. Many companies have done well despite poor geopolitical management but fail to ever capture the gains they would have from more prudent risk management or exploiting geopolitical dislocations.

A first step to shifting that mindset is to bring a series of experts in to ignite conversation at board level about how politics intersects with the company's operations or clients. Those conversations do not need to be part of a formal program in the first instance but will certainly underscore the need for the company to not ignore these factors. From there, the board can better calibrate the level of resources and attention that are required for the particular firm's context, with a special emphasis on making sure that the topic becomes an ongoing part of board conversations. Where geopolitics proves critical, the full Four A's model can be implemented.

About the Authors

Sean West is senior advisor at Eurasia Group, where he spent over a decade in a number of executive roles, including as CEO of the firm's innovation business and as Global Deputy CEO for the firm. Sean also serves as a nonexecutive director at Harvey Nash Group, the global recruitment firm. Sean is a noted geopolitical expert whose predictions and analyses have been recognized and published by the world's top broadcast and print outlets. He is an in-demand speaker on how firms and investors can best navigate the geopolitical cross-currents of a world turbo-charged by new technologies. Sean is an alumnus of Harvard Business School where he completed the Advanced Management Program. He holds a Master of Public Policy degree from UC Berkeley, where he taught U.S. politics and globalization, as well as a BS from the Georgetown University School of Foreign Service.

Rohitesh Dhawan is a global macro strategist at egX. He specializes in boiling down the complexities of the current geopolitical landscape into business-oriented insights. His twin capabilities as a political scientist and an economist positions him perfectly to help make sense of the current global economy and geopolitical order. He covers all major geopolitical issues, and has particular experience and expertise in the policies of the Trump Administration, global trade relations (and trade wars), Brexit and the future of Europe, African development pathways, Middle Eastern political issues, India's growth, China's influence in the rest of the world, and climate change and ESG-related issues.

Rohitesh also leads Eurasia Group's coverage of the (geo)politics of climate change and sustainability issues. He writes and speaks extensively on national and international climate change policy, decarbonization of the energy system. and ESG investing. He has served on the World Resources Institute's International Working Group and been named one of South Africa's Climate Change Leaders.

He has been a top-rated management consultant for over a decade and has been a trusted advisor to numerous Fortune 500 CEOs/principals, in addition to being a sought-after speaker for corporate retreats/strategy days as well as professional conferences.

Rohitesh has lived and worked on four continents and has first-hand experience in a variety of countries, including China/Hong Kong, India, Saudi Arabia, UAE, South Africa, Mozambique, Namibia, Nigeria, Senegal, UK, France, Germany, Sweden, Switzerland, Spain, Mexico, and the United States. Rohitesh is a trained economist and geographer from the University of Oxford.