Good morning,
Not long ago, companies in only a few sectors—energy, mining, agriculture—assigned time and resources to minding geopolitics for signs of strife. But today, a war or political shift on the other side of the world has become just as important to manufacturers, tech companies, social media brands, and retailers.
Boards and CEOs from all kinds of companies now routinely rank geopolitical risks as among their top concerns. Still, says Johan Gott, cofounder of Prism, a consulting company specializing in political risk, boards are not engaged enough. It’s still “a little bit too much talk and too little action,” he says.
Rather than merely acknowledging geopolitical threats that affect their company, he says, corporate directors ought to be taking action: prioritizing their risks, tracking those vulnerabilities through a dashboard or another mechanism, and running crisis simulations that allow a company to map their contingency plans in the face of hypothetical political events that could harm their employees, operations, infrastructure, supply chains, or capital investments. Boards should also be curious about the potential problems they’re ignoring entirely, he adds.
“We're really recommending the tracking aspect both of risks that you know well but that you’re not fully updating, as well as the unknown unknowns,” says Gott. “We do a lot of knocking on our clients’ doors to say, ‘Hey, look, are you tracking this?’”
Many corporate boards allow their geopolitical agenda to be dictated by the media, while losing sight of ongoing lower-profile risks, Gott explains. “The media reflects a reality that is not 100% aligned to corporate interests,” he says. For example, most of the recent inquiries Prism has fielded are about the conflict in Israel and Gaza—“a human tragedy” that rightly deserves media attention, he says. But unless the conflict escalates regionally and comes to involve Iran or one of its proxies, putting the world’s oil supply at risk, the corporate impacts are actually relatively low outside of Israel.
Another example: During Nancy Pelosi’s visit to Taiwan last year, when Beijing responded to Pelosi’s diplomatic trip by conducting military exercises off Taiwan’s coast, business leaders became concerned about possible blowback for their corporations. But the risk of Chinese forces invading Taiwan or enacting a blockade at that moment was low, says Gott, and the topic has since fallen off the radar of many business leaders even though that’s exactly the kind of issue that companies need to stay engaged with when the headlines around it have faded.
Anecdotally, Gott adds, compared to U.S. companies, he sees more European corporations and boards being slightly more disciplined about looking at geopolitical risks three to five years out.
John Rodi, who runs KPMG’s Board Leadership Center, agrees that rather than being entirely reactive to news events, boards ought to set up a framework to constantly assess risks. The largest U.S. companies are already doing so, he explains, but the importance of setting up a risk governance framework is still catching on at small and midsize businesses. Boards are “all over the map” in terms of the degrees of sophistication they bring to this issue.
Here’s some of his specific advice for boards:
—While annual updates were once sufficient, geopolitical risks now loom so large that they warrant quarterly updates and may even be relevant at every board meeting.
—Bring in diverse views through outside advisors. Take stock of your own geopolitical acumen (and potential biases) and consider the value of this expertise when recruiting new board members.
—Remember to map how various risks, including those connected to politics, polarization, and conflicts, interact with one another. How does a change in your supply chain because of a global incident impact your environmental or social goals?
—Make sure that specific members of a company’s management team are made responsible for monitoring relevant geopolitical risks and periodically reporting on them to the board. The challenge is finding the right level of granularity, Rodi cautions: “If it's too high-level an analysis, then that’s probably going to give you limited insights. If it's too granular, then that could be an unwieldy risk-management process.”
Lila MacLellan
lila.maclellan@fortune.com
@lilamaclellan
