The international system at large is undergoing a transformation, with rising trade barriers fueled by resurgent nationalism and authoritarianism. Seemingly ad hoc unilateral actions disrupt trade without reaping any discernable benefits for the initiating party other than projecting the image of a strong state. Multilateral frameworks are eroding, international agreements weakening and alliances shifting. A case in point is China’s increasingly assertive international posture, challenging American hegemony and extending its global reach by targeting credit-poor countries in Africa and elsewhere.
Distrust and Imagined Stability
Non-state conflict and terrorist activity is on the rise, while trust for media and politicians is waning. Grass root movements and populist parties demand radical change in places we previously thought of as stable democracies. The Brexit debacle in the UK, the Gilets jaunes in France, the unrest in Hong Kong and Barcelona, coupled with a sense of rising crime levels in urban centers across Western Europe has shaken our preconceptions.
Alongside these real or imagined threats to the powers that be in some parts of the world, other regions have seen a dramatic increase in defense procurement and militarization, often coupled with authoritarian and/or autocratic rule being further entrenched. The tension in the Persian Gulf is a case in point, threatening the world’s supply of vital energy resources, putting existing alliances to the test and creating new ones previously regarded as unthinkable.
Overstretched Inter dependencies
Equally, a long period of globalization has created long supply chains involving several entities in multiple jurisdictions, with numerous subsidiaries, affiliates and partners all part of the indirect sphere of influence while also being potential sources of reputational risk and conflict of interest/ disloyalty issues.
No wonder corporate decision makers have a hard time identifying who’s who in the “family”. No wonder compliance departments feel their ability to assess counterparty risk is limited.
WEAKENING RULE OF LAW
The resurgence of authoritarianism in the Middle East and elsewhere has brought increasingly hostile legislative and other measures to curb press freedom and other universal human rights. One example is the use of so-called cyber laws to track and punish dissent. The lack of transparency, the weakening of rule of law and increasing government interference also carries the risk of overestimation of a local market’s economic potential, apart from more “classic” risks of expropriation, unrest, forced abandonment and official corruption. If economic theory is anything to go by, the world’s negative slide toward weakening rule of law will discourage investments.
EVOLVING CYBER THREATS
While the risk of information security breaches perpetrated by hackers and organized crime groups is constantly highlighted in various threat assessments, state actors have increasingly deployed their cyber capabilities to conduct asymmetric warfare. State actors can inflict massive disruption while maintaining plausible deniability. Both the US and Iran have deployed these assets against each other, while China has exploited vulnerabilities to conduct industrial espionage for commercial gain. Sometime state actors and non-state actors collaborate, with criminal networks acting as subcontractors for government agencies.
Both Chinese and Russian IT companies have been denied market access due to allegations of their software being used to further non-commercial geopolitical interests. Extended supply chains also pose cybersecurity risks as third-party suppliers have access to the company’s network and might be exploited as weak links.
RESURGENT PUBLIC ACTIVISM
The role of social media is disputed. The allegedly destructive role in fomenting opinion polarization has been contested by those who say it provides the only viable communication channels for endangered human rights activists and reporters. Either way, social media has undoubtedly been instrumental in the recent resurgence in public activism, addressing issues including but not limited to climate change, gender equality, job security and immigration. Thanks to the technological development, full-scale PR campaigns can now be deployed in no time while minor incidents can be amplified and cause massive reputational damage.
The increased public scrutiny of corporate behavior also holds true for government agencies and other watchdogs who have stepped up their efforts to make companies comply not only with regulatory requirements such as sanctions and anti-money laundering legislation, but also norms and standards including gender equality, environmental accountability and social responsibilities. A case in point is the increased focus on so-called “corporate tax transparency”, i.e. multinational corporations disclosing their numbers and refraining from previous tax minimizing schemes.
IS CSR THE ANSWER?
Companies have responded to above challenges by creating ethical guidelines within a general framework of corporate social responsibility and have also taken steps to clean up their act under the banner of sustainability. However, commendable as they may be, corporate efforts to improve society do not address key challenges in terms of how companies deal with risks, especially if CSR efforts are primarily intended for public consumption.
Today’s world is multipolar and volatile, with waning trust, resurgent authoritarianism and rising public activism as well as non-state conflict. Companies are beset by multiple sources of interdependent risk categories which defy existing modelling strategies and management practices. Simultaneously, companies must balance diverse compliance requirements against their own ambitious growth targets. External pressure also comes from a growing set of stakeholders including climate activists, international watchdogs, US law enforcement agencies (anti-bribery), the European Union (tax evasion), human rights organizations, etc.
With all this pressure piling up, companies need to reconsider their existing risk management systems and, in many cases, replace them with more holistic systems which will enable them to navigate more efficiently in this vast ocean of pitfalls and threats. They need systems which not only consider political and geographic risks but integrate them into the decision-making process. By applying a geostrategic perspective, companies will not only mitigate risks but also identify new opportunities and reveal hidden growth potential across countries and continents.
However, many companies face numerous internal obstacles to efficiently manage risks such as siloed risk functions, biases in terms of age-old loyalties, vested interests, etc., reliance on incomplete third-party data, and finally the pressure to simultaneously meet both growth and compliance requirements. The traditional check-the-box mindset is a cultural obstacle, with static red-flag categorization in terms of political exposure, corruption and high-risk jurisdictions. This needs to be reevaluated and reinvented, as companies must increasingly enhance their understanding of the world and strive for more than just minimal regulatory adherence and short-term loss avoidance.
Counter-party risk is a key risk that needs to be managed in today’s globalized environment. Now more than ever, companies need to familiarize themselves with their counter-parties and the countries and regions where they perform their business operations. Corporate decision-makers must consider human rights records, environmental policies, cyber security vulnerabilities and the potential reputational fallout of working too close with a regime seen as repressive, while also having to deal with traditional issues of concern such as economic swings, currency exchange fluctuations and infrastructure quality issues.
All in all, there is a strong case to be made for geostrategic risk management as the world order is increasingly interconnected and multipolar. However, making risk management a strategic priority is not enough. The company’s capabilities must be embedded throughout the organization and age-old mindsets need to be replaced by contextual risk awareness to optimize performance across countries, functions and departments. In this regard, language skills, expat experience, familiarity with different political systems and other “brainware” capabilities will become increasingly important to harvest and interpret information in a global business environment.
New technologies should be embraced, but exclusively relying on automated data collection will not address existing risk management flaws and deficiencies. Rather than setting their hopes on artificial intelligence and machine learning to solve all risk-related issues in the future, companies must act now to achieve a higher level of risk resilience. In times of fake news and waning public trust, there is a greater need than ever for old-fashioned investigative techniques such as independently verifying facts in primary sources rather than relying on fragmented and incomplete data collection.