Managing political risk in an uncertain world
Published 1 April 2016
Former U.S. Secretary of State, Madeleine Albright made headlines in 2014 when she stated “the world is a mess”, in reference to the simultaneous eruption of conflicts and civil unrest all over the globe.
The geopolitical picture on which she based that statement has not changed fundamentally in the intervening two years. The International Monetary Fund recently cut its global economic growth forecast for the fourth successive time in a year, citing geopolitical conditions as a key factor in that decision. Governments in both developed and emerging economies are grappling with a host of political and security-related challenges, ranging from civil unrest connected with economic uncertainty to the rise of anti-establishment political movements and threats of interstate conflict.
Nevertheless – and often in spite of such pessimism – cross-border trade and investment flows have not ground to a halt. In fact, many businesses readily acknowledge that an international outlook remains critical to their growth plans. The challenge comes from balancing the opportunities presented by ‘going global’ against the seemingly greater geopolitical obstacles that have emerged in recent years. This can be a daunting task for in-house lawyers who are used to doing business in countries where political stability is taken for granted.
It will come as no surprise that a ‘one size fits all’ approach is often not useful in the assessment of geopolitical risk. The political and security risk profile faced by a particular business depends on a host of specific factors. Conditions can often not just vary country by country, but at a far more local level. Exposure to such events can also be a function of the industry in which a company operates, the nature of its investment, and even its nationality. Nevertheless, there are some overarching issues to consider when determining how best to manage these challenges.
Political Risk is Constantly Evolving
In the modern world, events can move with breathtaking speed. Small localised protests can, with the help of modern technology and social media, spiral into a widespread uprising against an unpopular government. This, in turn, can spawn broader regional instability. All of this was aptly demonstrated by the events of the Arab Spring in 2011, the effects of which are still felt today.
The assessment of a country’s political and security risk environment should not, therefore, be static. Not only will businesses need to establish a baseline understanding of these issues as they embark on an international venture, but they will want to subject underlying assumptions to regular reassessment. Circumstances can change over time and outwardly innocuous events can portend more fundamental challenges. Geopolitical due diligence needs to remain active if it is to yield the greatest benefits.
Entering a new jurisdiction can often appear daunting as businesses grapple with new cultures, laws, and politics. Different participants in that process such as lenders, insurers, investors, and directors may have varying perceptions of those challenges based on their own experiences or even what they hear on the news.
It is important, therefore, to be prepared for questions from such parties about the risk profile in a particular location and to demonstrate that these apprehensions have been factored into the overall due diligence process. The last thing companies will want is for a transaction to be delayed at a very late stage in order to gather such information and assuage the concerns of stakeholders.
Political Risk and Reputation
The review of the political and security risk environment in a particular location often focuses on fundamental issues such as threats to life, limb, and property. However, a comprehensive risk assessment will also consider potential second-order consequences of geopolitical events, particularly with respect to intangibles such as reputation. For example, will a company face criticism by virtue of doing business in a country in which human rights are not respected, or in which particular actions of a local government are distasteful to public opinion at home?
These reputational consequences have become all the more acute as advocacy groups have focused much greater attention on linking international commerce to issues such as respect for human rights, and compliance with anti-bribery and corruption laws. The enactment of the UK Modern Slavery Act in 2015 demonstrates that such concerns are only likely to grow, requiring a much more holistic approach to the assessment of political and security conditions in different parts of the world.
Developing a Crisis Management Strategy
In all aspects of risk management, in-house counsel know that the time to develop a crisis management strategy is not when the crisis emerges. This is no less appropriate when dealing with geopolitical upheaval. Even if the specific nature of a predicament cannot be fully anticipated, companies can use the due diligence process as a springboard for developing an international crisis management framework.
Which business functions, for instance, should participate in the crisis management team? At what point should political concerns be elevated to senior executives? To what extent can a company rely on support from government or international organisations to deal with these matters? What are the reporting lines for disseminating information on the country affected by the crisis, particularly if the company does not have staff on the ground to act as primary sources?
With headlines dominated at present by news of new or escalating political and security-related events, it can often seem that businesses are operating amidst a geopolitical storm beyond their control. Nevertheless, the strategies outlined above can enhance awareness of these issues and lay the foundations for a more comprehensive approach to political risk management that provides reassurance in times of uncertainty and allows companies to focus on the opportunities that exist internationally.
David Chmiel – April 2016
David Chmiel is co-founder and Managing Director of Global Torchlight, a geopolitical risk consultancy. He previously practised for ten years as a mergers and acquisitions lawyer in the London and Chicago offices of a major global law firm.