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.