As if ESG – environmental, social and governance – risks weren’t already complicated enough, there’s a new “G” on the agenda of many corporate boards: geopolitics.
In light of the war in Ukraine and rising tensions in other parts of the world, companies are reassessing their dependence on certain regions and their dependence on specific partners, suppliers or governments . Many companies are asking critical questions about the nature of their business and how escalating geopolitical tensions will affect it. And if they aren’t, they should do it quickly.
- Does our manufacturing process rely on inputs from only a few countries?
- Do we need a plan to shut down our operations in other countries if something goes wrong?
- How should we factor in geopolitical risk when deciding where to make our next big investment?
- What does “friendshoring” mean for our company?
Regardless of the companies’ response to these questions, several things are clear. Current geopolitical risks have an immediate impact on business decisions. Many boards and management teams feel ill-equipped to assess and manage these issues, perhaps because they have arisen in an era of increasing globalization. And global companies will no doubt find it extremely complex to communicate their positions on geopolitical issues.
Current approaches miss the mark
Even companies that had been largely insulated from geopolitics for the past few years are affected. In a EY survey conducted in 2021 with more than 1,000 executives94% said they had been affected by unexpected political risks in the previous 12 months.
Companies are learning new skills in response: 58% prioritized improving how their organization assesses political risk. Most, however, have been in reactive mode; only one in three said they proactively coordinate political risk management and only 25% of boards regularly considered political risk when making decisions. Additionally, research shows that executive confidence in political risk management has plummeted.
Respond to new risks
In the face of issues that arise due to today’s turbulent geopolitical landscape, it is essential to have a plan rather than simply reacting to events in the moment.
Where to start? There are several actions that boards and management teams can take to meet such challenges.
The first step is to reiterate a company’s purpose – why is the world a better place because the company exists? And therefore, why does the company expect to succeed? This goal can be very simple – from a local restaurant serving good food to its neighbors – to more ambitious ones like Unilever’s”Making the sustainable lifestyle commonplace.” Regardless of scale, purpose is the starting point for addressing geopolitical issues.
Compiling an inventory of key stakeholders is the next step in the process. Who really counts for the company to succeed in achieving its objective? Is it employees, customers, supply chain? A business with local customers may have very different geopolitical issues than one dependent on government business, for example.
With this in hand, a business can think about the impact a geopolitical situation might have on its day-to-day operations – the previously mentioned “dependencies”. Who are the actors most affected by the current situation? Could a key market or input be cut off? Could their employees and their families be affected? Could the company’s reputation suffer if it gets caught on the wrong side of an issue?
Although it is difficult to predict with certainty what may happen in the field of geopolitics, it is possible to anticipate various scenarios and reflect on the results in a tabletop exercise. As corporate boards have seen with cybersecurity or activist attacks, it’s critical to proactively look into the problem before the storm hits.
And finally, what should the company do to integrate geopolitical risks into its long-term strategy? Are changes in resources, objectives or risk management systems necessary? Are there trade-offs to ensure key objectives are achieved given the new circumstances? Some of these can be uncomfortable discussions about issues that we hope won’t happen, but we’ve all learned that the unthinkable – like a global pandemic – can happen.
Today’s CEOs face pressure to address a range of social or political issues that in the past were beyond their purview. In the geopolitical arena, messaging is a real challenge, especially for companies with a global footprint. And it’s hard for companies to control the narrative.
For example, the Yale School of Management has a public list of companies that have withdrawn from Russia – and those who still operate there. There are also lists of companies related to Uyghur labor, the Chinese defense industry, and almost every other geopolitical issue imaginable. And, of course, a popular position in one country may be deeply unpopular in another. It is more and more difficult to avoid a misstep.
The only practical way to have consistent communications on these topics is to build on the questions above about purpose, stakeholders, and strategy. Globalization has been a wind at the back of many of today’s top executives, and serious geopolitical issues were part of the history books. For these leaders and their organizations to successfully move forward, they must uncomfortably acknowledge that geopolitics is the new “G” of ESG.