Business leaders need new skills to understand and respond to today’s geopolitical risks, argues Paul Lewis.
On 8 May 2018, President Donald Trump announced that “the US will withdraw from the Iran nuclear deal” whose “decaying and rotten structure,” he said, “could not prevent Iran from acquiring a nuclear bomb”. He added: “If I allowed this deal to stand, there soon would be a nuclear arms race in the Middle East.”
For business leaders who had hoped that the lifting of sanctions would open up enticing investment opportunities in Iran, this volte-face may re-enforce the sense that the geopolitical environment in which they work has become a lot more unpredictable.
Perceptions are constantly changing. Barely a week before, as war clouds were forming over the Korean peninsula, South Korea’s leader suggested that President Trump be awarded the Nobel peace prize for bringing North Korean dictator Kim Jong-un to the negotiating table – a sentiment echoed just days later by foreign secretary Boris Johnson.
Such an endorsement might also have come as a surprise to many. When the real-estate broker turned reality-TV show host, who had never previously held a political position, became US president, he was deemed by some to be unfi t for high office.
But Mr Trump’s disruptive approach to the world’s political and trading arrangements may not be a by-product of inexperience. Unpredictability might be viewed as a defining feature of his entire foreign policy approach. It would therefore be understandable if company executives feel increasingly ill-equipped to navigate in this era of geopolitical upheaval that Mr Trump has ushered in.
A new paradigm
It wasn’t always so. For the past three decades, companies have operated according to certain fundamental political risk assumptions. Following the end of the cold war, executives could reasonably assume that – except for the occasional pitfall and reversal – much of the world was heading inexorably towards free-market democracy.
As the environment has changed, so too have the demands placed on the risk manager.
Governments in central eastern Europe, China, India, much of Africa and Latin America were all welcoming foreign investors. Butthis ‘Davos-style’ consensus is now fraying – so much so that senior executives are scrambling to reappraise their political risk assumptions, and asking what skills and knowledge they now need in order to cope and thrive.
“We are living in an age of disruption that we haven’t seen in a very long time,” says Roula Khalaf, deputy editor of the Financial Times.
In a learning workshop for senior executives organised by the FT | IE Corporate Learning Alliance, she points to four intersecting trends that make it particularly difficult to predict where key markets might be heading: the rise of authoritarianism; shifting alliances; the erosion of rational politics, and the US under Trump.
“The most important change is Trump,” says Gideon Rachman, Financial Times chief foreign affairs commentator, “because America is the underpinning of the security system and the economic system.” Trump’s emphasis on strong sovereign states over multilateralism has undercut the US role as global rule-setter and police officer.
In particular, it has undermined the credibility of the trading systems such as NAFTA without offering a plausible alternative regime. The World Trade Organisation – the post-Brexit back-up for the UK should its EU negotiations flounder – has been weakened following a US veto over appointments to its appellate body.
Trump’s ‘transactional’ approach to politics heightens the dangers of political mistakes and misunderstandings, says Rachman. Executives running big global brands are now asking whether they should press on with global supply chains or retrench to more established, familiar markets.
At the same time, international alliances are shifting. Unlikely bedfellows such as Russia, Turkey and Iran have found common ground in Syria. The overturning of the Iran nuclear deal may throw up still new alignments. Israel and Saudi Arabia already have identified the common enemy. It remains to be seen how the EU, Russia and China respond.
Another complicating factor is the rise of populism. This, coupled with a decline in self-confidence in liberal western values, has led to hitherto unthinkable political scenarios, including in western Europe where far-left and far-right populists are attempting to return to discredited political certainties of the past.
More fundamentally, the explosion of fake news on social media and the resort to ‘emotional’ policymaking has befuddled rational policymaking even among mainstream politicians.
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Nowhere is this more pronounced than in debates over immigration. The flow of migrants and refugees, whether from the Middle East, sub-Saharan Africa or failed states such as Venezuela is undermining confidence in borderless markets, a foundation stone of the EU’s single market.
Finally, executives are asking deeper questions about what economic systems are now likely to produce the best profit growth. Until recently, democracy was almost universally assumed to provide the essential preconditions for long-term economic expansion.
To be sure, plenty of investors have prospered under dictatorships. Extractive sector companies in particular must operate where natural resources are located, regardless of the regime’s nature. But investor sentiment might now be shifting.
Since the 2008-09 global financial crisis, household incomes in developed economies have remained flat, the first time in living memory, and analysts are now even suggesting that some authoritarian governments may offer a better long-term commercial bet.
Foreign investors from banks to FMCG companies, for example, have welcomed China’s clampdown on corruption, even though such campaigns often spill over into arbitrariness, harming those companies that find themselves on the wrong political side.
Making sense of endless risk permutations
So this is the volatile and unpredictable political context in which business leaders now find themselves operating. Many feel ill-equipped to judge those risks, let alone act on them. As the environment has changed, so too have the demands placed on the risk manager. Once a marginal role (except in hostile emerging markets) the need to understand and appraise political threats has become essential.
From a change in government to the possibility of war in a key market, the risks carry new potency. An unexpected development can damage a product, wreck a reputation, disrupt carefully calibrated logistics and even endanger staff.
About the author
Paul Lewis is editorial director of FT | IE Business School Corporate Learning Alliance. Find out more at www.ftiecla.com