The following is an excerpt from a conversation that took place at MLR Media’s 2024 Character of the Corporation Conference.
SPEAKERS: MERIT JANOW, chair, Mastercard; JAMES LAM, director, BlackRock iShares; VADA MANAGER, director, Valvoline; BILL ROCK, president and CEO, MLR Media
ROCK: How do the boards you serve on ensure that management teams proactively identify and assess geopolitical risk? What frameworks do you recommend boards think about and use?
LAM: Here's three data points to put this topic in context. The 2023 McKinsey Global Survey rated geopolitical risks as a top three concern for corporate boards. In 2024, we had our Presidential election, but there’s 70 countries that are holding national elections, which is about half of the world’s population. Third, U.S. National Intelligence released a report titled Global Trends 2040. It said that we are at the highest geopolitical risk level since the Cold War. Going forward, we should not expect that level to go down.
I think one of the frameworks that directors ought to consider is geopolitical scenario analysis. Your board should be asking have we done it or how can we do it better? To me, there are several steps in a scenario analysis framework. Starting with a global risk analysis, looking externally outside-in: what’s going on and what are some of the geopolitical events that could impact the company? There are a lot of things that could happen, but what is important is assessing the company's performance sensitivities with respect to earnings, value and operational risks, like supply chain or the health and safety of our employees.
The next step is to develop a set of scenarios. I’ve seen companies do three or four scenarios and I’ve seen companies that have done up to 10 different scenarios. And I would recommend that the board and management conduct workshops outside the context of a board meeting. These are informal workshops to hammer out the right scenarios, because I think directors coming from different industries and different senior level roles have a lot to offer in terms of input. Then develop a set of early-warning indicators. What are the metrics? What are the indicators that would let us know a scenario is happening? What are the action triggers and the action plans? If we hit some of these triggers, what are we going to do about it?
And then there's monitoring and reporting. How do we incorporate these metrics and indicators? How do we update our reports so that the board is monitoring these events on an ongoing basis? Scenario analysis is a critical tool. And many of these risks, we don’t have a lot of data historically, so we must rely on forward-looking approaches.
JANOW: I’ve had the privilege of working with remarkable global companies for many years. The world is now undergoing several changes simultaneously. It’s the magnitude and the variety of uncertainty that is particularly noteworthy. Geopolitical risk as such is not a new thing. It’s just that there are now many different vectors of it happening simultaneously and in different ways. There are at least three dimensions underway at once: structural factors, policy factors and geopolitical factors that are combining to increase uncertainty. Global companies are fortunate to have people on the ground. Management must make sure that those people are tracking the right things and reporting back to integrate that expertise and intelligence into strategy. That network also needs to be engaging or having the means to trigger different parts of the company. Global companies also need to engage multiple stakeholders around the world to gain insight and ensure that corporate practices are understood and appreciated in different jurisdictions — this can include regulators, public policy experts, and legal and policy units that are often essential features for global companies.
As a director, understanding and supporting the management team in mobilizing that capability in support of its strategy in a changing world can be part of what is covered by a nominating and governance committee, a risk committee and the full board, depending on the topic. Boards need to have exposure to how senior management are evaluating global conditions. Risk committees can also be a place that considers geopolitical risk. Risk committees are set up in many different ways depending on the industry. Some risk committees can be forward-looking, considering not only business risk broadly but also information security and operational risks, among others. Typically, nominating and governance committees tend do the deep dive on regulatory and policy dimensions. In addition to these different committee areas of engagement, at the board level, it’s very valuable to routinely look at different geographies. Of course, strategy is a central focus. But you also need to consider and understand how that strategy works in different geographies, and that can bring in other factors. The boards I’m on routinely bring in outside experts to talk about different things happening in the world. And several of the boards I've been on have had experienced directors from different parts of the world — with both geographic and functional expertise. This wide range of expertise has added tremendous value. Another learning from serving on boards is that it is useful to have a regular cadence of examination to these issues. These are not issues that you want to have come up when you have a problem. These are all part of the layering of engagement around an increasingly complex world.
ROCK: Vada, can you comment on an instance where early identification of geopolitical risk led to a strategic adjustment?
MANAGER: I would say it may be one that you all faced as well. In my time as senior director of global issues management at Nike, we began to see early businesses in Asia — footwear, apparel, sourcing companies in Thailand, Indonesia and Vietnam, for example — having instances of avian bird flu. We began to twin-source in other countries that may not be as vulnerable to that scenario. We had parallel sourcing operations in those places so that, if we did have to shut down a national sourcing location, we had a parallel process in order to bring product in. That's not always easy to do when you’re talking about the volume of footwear that we were doing, but much easier to do with apparel and things of that nature.
Myanmar was another decision, as well as the situation in Nicaragua when there were changes there. You have to have a dedicated resource that’s operating around the world. Another “pro tip” would be to trust your people locally on the ground to give you counsel back. Don’t try to centralize all the decision-making in the boardroom with the CEO. Sometimes, you need to empower those local country managers and decision-makers to give you feedback. Obviously, you have a responsibility to have oversight but having those country managers give you feedback and trusting their judgment while being operationally in touch with them can be of great value in making decisions about how you’re going to navigate such crises around the world.