Conflicts of business interest
February 23, 2016
Increasingly interconnected geopolitical risks are a growing source of concern for businesses, highlighting the need for measures to improve resilience.
There are pros (delicious) and cons (unhealthy) to cheeseburgers, but they are rarely caught up in geopolitical tension that directly affects a business. Last year, however, an iconic American fast food company had several of its Moscow locations temporarily shut down by Russian authorities in a thinly veiled response to U.S.-led economic sanctions. The sanctions followed Russia’s military action in Ukraine, and the closure of the eateries was accompanied by a proposal to launch government-backed, patriotic-themed Russian competitors.
The blurring of geopolitics and business is not new, but incidents of it appear to be on the rise. “We have seen an increase in losses by corporations due to geopolitical risks, specifically damage to assets and business interruption after that damage occurs,” says Jim Thomas, Global Head, Credit and Political Risk, Zurich Insurance Group. “In some cases, we’ve seen businesses forced to abandon projects altogether when the situation became too dangerous. Disruption of supply chains as a result of geopolitical risks has also become a very real issue.”
Report highlights concerns
For the second year running, a survey of its members by the World Economic Forum (WEF) revealed that geopolitical risks are top of mind among global leaders. The results of the survey were reported in The Global Risks Report 2016, which the WEF publishes in collaboration with Zurich Insurance Group. The report cites a “vacuum created by frail or weakening states” and a “return of strategic competition between strong states with conflicting interests” as the prime reasons why “companies are vulnerable even if they have no immediate presence in the geography where the risk arises.”
“Geopolitical risks” cover an array of threats to businesses that includes interstate conflict, terrorism and failure of national governance. For businesses, new risks and costs arise from the difficulties of working in an unpredictable environment and complying with international standards when fragile governments do not themselves adhere to international regulations. These costs can be serious enough to become unsustainable in the long run. The Global Risks Report 2016 indicates that executives in 14 economies perceive failure of national governance as the highest risk to conducting business. Half of those economies are in South America—many at the mercy of the commodities crisis—and governance-related risks could seriously undermine the competitiveness, job creation and economic development of the majority of the continent.
At the same time, not all businesses have the luxury of choosing stable locations. Mining and energy companies, for example, must operate where the natural resources are found.
“There are many strategic assets and investments around the world that companies cannot walk away from,” says Thomas. “To stay committed to those opportunities, businesses must stay very risk aware and build resiliency into their systems. The key is to develop a systematic approach to the risks you know you face, and to reacting to new risks as they arise. These are times of challenging geopolitical risks, but they are not unprecedented. With a risk management strategy focused on resilience, businesses don’t have to immediately rule out a potential market based solely on surface appearances.”