A veteran board member and former senior U.S. government official suggests how directors can best address the risks of international business.
Boards can little afford relegating anticipation of tomorrow’s international news to scriptwriters of screen life’s “Homeland,” “24” and “Madame Secretary.” For the organizations directors serve, the significance of geopolitics, broadly defined, can be momentous.
Effective directors must continually be alert to both world affairs and little-noted trends. The board should help inform and temper management’s operational reactions to events far and wide. A broad spectrum of policy issues, transnational to locale-specific, must be routinely considered. Neglecting to reassess the enterprise’s long-term strategy with practiced eyes on developments around the globe amounts to ignoring formidable risks and forgoing significant opportunities.
The term “geopolitics,” referring to geographic influences on power relationships in international relations, came into scholarly parlance in the early 20th century. A broader, contemporary usage stems from expositions by Henry Kissinger and recent commentators; and the even more comprehensive notion of “geopolitics” in today’s vernacular can be traced, in part, to on-screen dramas and airport bookshop novels. As an academic field of study, this discipline looks backward to discern patterns indicative of future possibilities. In practice, geopolitics demonstrates that, as attributed to Mark Twain, “History doesn’t repeat itself, but it often rhymes.”
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Since World War II, the number of countries has doubled; international tensions have re-intensified; power has transitioned between, as well as within, nation states; and non-state actors have garnered unprecedented capabilities to affect world order. Although Francis Fukuyama’s influential 1989 essay proclaimed “The End of History,” he now acknowledges that the eventual global triumph of political and economic liberalism is in question.
Markets, supply chains and even overall company performance and valuation are therefore profoundly affected by much more than the tectonic moves of major world powers. Potentially neglected incidents — from Wuhan to Minneapolis — can define an era. This presidential election year, amid a pandemic, is marked by disruption, volatility and uncertainty. And no organization is immune from their consequences.
Geopolitical risks and business
Some companies undeniably have greater exposure to geopolitical risks than others; but regardless of size, mission, footprint, markets, or products and services, no 21st-century enterprise can escape the impact of geopolitics. Currency valuations, environmental and labor regulations, taxes and tariffs are but the most obvious concerns. To avert unwelcome, costly surprises and reveal occasions for competitive advantage, the board’s disciplined attention to an ever-changing array of pertinent international issues, as well as geographic- and nation-specific questions, is critical.
The requirement of boards is not merely to monitor events or to identify “trouble spots.” Responsible directors, whatever their professional backgrounds, must stay informed regarding international trends and phenomena posing threats to their firm’s industry, stakeholders, markets and customers, labor pool, supply and production chains, cost structure — and even its fundamental business model.
The corporate board must integrate more frequent and detailed geopolitical risk analysis and scenario planning into decision making. Management’s sources of information and processes for discerning emerging issues should be evaluated. In this way, investment impairments may be avoided, reduced levels of return on investment minimized and sovereign risk mitigated.
Matters of environmental, social and governance concern, including the “Black Lives Matter” and “Me Too” movements, now have historic global impact. The coronavirus pandemic and its aftermath may pose greater hazards than even 9/11 or the 2007-2009 global financial crisis — not only to public health, but also to traditional alliances, political polarization, trade and imbalances in national budgets.
Around the world, laments of economic discontent and rising populism had already challenged globalization. Yet COVID-19 has laid bare inequality between and within countries. Its personal tragedies, economic devastation and political recriminations have heightened international tensions. Progress made in developing regions has been severely undercut. And with considerable criticism of the United States’ and China’s respective responses to the virus, what existed of the world order has been further fragmented.
Especially amid this pandemic, the alternative possible outcomes of November’s election promise starkly different consequences. The election will influence whether, and how, globalization might bounce back. The specific, far-reaching policy issues facing whoever resides in the White House Jan. 20 are exceptionally challenging. His choices will likely reverberate to an uncommon degree in both distant capitals and corporate headquarters.
A director’s to-do list
Staying generally informed on public policy and international affairs via readily available publications is not sufficient; nor is sporadic attention prompted by “news of the quarter.”
Fundamentally, the responsible board should not only include international risk analysis in its audit committee’s formal enterprise risk management process, but also integrate broadly defined geopolitical considerations into core deliberations. And to enhance directors’ capacity to anticipate, assess and manage the potential consequences of said developments, additional steps warrant consideration:
- Expectations that management heed international developments both defensively and offensively.
- Requirements that management presentations routinely address broadly defined geopolitical issues.
- Board composition that includes members with multinational experience and/or international responsibilities.
- Designation of one committee or director as having principal responsibility for digesting the stream of international reports, data and analyses related to specific areas of corporate relevance.
- A disciplined routine of geopolitical impact assessments and scenario analyses.
- Regular — at least annual — board briefings by independent authorities.
- “Geopolitical considerations” as a customary element of public policy reports and extended board meetings.
- A dashboard of company-germane, data-driven barometers and judgment-based assessments of elevated geopolitical risks.
- Annual evaluation of the sources of input related to international developments.
- Retention of a geopolitical advisory firm that draws on a network of objective experts and/or distribution to directors of reports from non-partisan research institutions, such as the RAND Corporation (for which I am a trustee) or the Center for Strategic and International Studies.
- Informal association with, and/or retention of, individuals whose engagement with pertinent public- and private-sector players can provide actionable insights.
- Consideration of whether political risk insurance is appropriate and cost-effective.
- Provision of directors’ subscriptions to insightful print and/or Web periodicals.
- Addition of the adequacy of the board’s analytical capabilities and processes regarding international issues to the criteria considered in board evaluations.
With every board, perspectives, political inclinations and personal interests of directors invariably differ. Lest discussions of these topics become contentious, authoritative input and evidence-based analyses are essential.
Other expectations of present-day boards are imperative: more diverse backgrounds and competencies, more exacting governance and more innovative thinking. Greater concern for broadly defined geopolitical issues, admittedly, may require further commitments of time and resources.
But directors know that divining where the world is heading is more demanding than what popular fiction depicts. Steady attention to geopolitical developments relevant to the company they serve is required — a continuous process of proactive observation, inquiry, informed conjecture and scenario planning. The conscientious board will thereby have far better odds at dodging calamities and seizing opportunities than would Hollywood’s Carrie Mathison, Jack Bauer or Elizabeth McCord.
Philip Lader was U.S. Ambassador to the Court of St. James’s, chairman of WPP plc and a member of President Clinton’s cabinet. A director of AMC Entertainment, RAND, and several privately held companies and foundations, he has served on the boards of Lloyd’s of London, Marathon Oil, AES, Songbird (Canary Wharf), Minerva, Rusal, the American Red Cross, British Museum, St. Paul’s Cathedral and the Smithsonian Museum of American History. He is also a member of Morgan Stanley’s Global Real Estate and Infrastructure Investment committees and the Council on Foreign Relations and was president of Business Executives for National Security.