The world is experiencing a tectonic geopolitical shift. A series of events over the past two years—including Russia’s invasion of Ukraine, the growing tensions between the United States and China, and most recently the burgeoning conflict between Israel and Palestine—has brought unprecedented uncertainty, volatility and geopolitical fragmentation.
Coupling these events against the backdrop of the weaknesses exposed by the COVID-19 pandemic in global supply chain resilience, crisis preparedness and response, the challenges facing corporate boards of directors and the organizations they oversee have not been greater in recent history. Boards must be laser focused on geopolitical risks, understanding the significance and impact of international developments, and calculating the long-term consequences of these paradigm shifts.
Boards of directors play a critical role in overseeing and assessing the corporation’s management of geopolitical risks and the responses to changes in circumstances and operating environments. Navigating export controls and sanctions, in particular those involving Russia, are made complicated by the sometimes-competing sanctions regimes of various nations. With the current tensions between the U.S. and China, companies are grappling with the question of de-risking versus decoupling from China, and evaluating their preparedness for the ever-constant cyberattacks from Chinese state actors. Realigning supply chains or repositioning operations to another country is a difficult decision as it requires a multi-year investment and taxing manpower and faces a significant risk of a future unexpected geopolitical shift.
As every business will face some kind of challenge related to the current global operating environment, it is critical that the board of directors supports the organization by ensuring management has robust capabilities and processes for managing geopolitical risk. In that regard, the board should verify the following:
• Board Composition: The board of directors has the right composition, competencies, experiences and diversity of thought to understand and mitigate geopolitical risks. Depending upon the nature of the enterprise, the board may want to consider the establishment of a committee dedicated to geopolitical risk.
• Risk Assessment: The company can accurately and effectively identify and assess the geopolitical risks that may adversely impact the business in a comprehensive risk assessment that has a forward-looking view projecting geopolitical risks out two or more years.
• Mitigation Plans: The company should have plans in place to mitigate the highest and most probable geopolitical risk scenarios. In addition, the board of directors and management should be trained on these mitigation strategies and engage in periodic scenario testing to ensure preparedness and plan effectiveness.
• Intelligence Gathering and Analysis: The organization has an effective methodology to collect timely and useful intelligence on pertinent geopolitical developments relevant to the business that can be synthesized and distributed to key stakeholders. The intelligence should provide scenarios and potential implications for relevant parts of the business. Some organizations have geopolitical intelligence units, while others might have advisory councils comprised of expert third parties with insights and different perspectives. These units would regularly brief senior leadership teams and board of directors regarding critical geopolitical risk developments and their implications.
• Holistic Approach: Geopolitical risk should be viewed through a broader risk lens that considers the implications of related risks such as financial, legal, and reputational risks.
The board of directors should also be questioning management decisions on issues that could be affected by geopolitical change. For example, boards of directors should understand the mechanisms in place to ensure supply-chain resilience in high-risk markets. An organization that has significant human capital that travels to high-risk geographies should be able to provide the board with contingency plans to extract colleagues in the event of an issue. Intellectual property protection and the steps an organization takes to prevent the exfiltration of sensitive data is another important board issue, especially with the rise in insider-related fraud and trade secret thefts engaged in by China nationals and others. A final example, and a bit more mundane, relates to the insurance coverage that the organization maintains and whether it adequately addresses the geopolitical risks contemplated by the company.
The shifting geopolitical landscape has created an urgency for boards to be prepared for unprecedented changes and risks that may have not been considered in the past. An engaged and knowledgeable board will assist management with building and stewarding a resilient organization that can withstand the geopolitical shifts of tomorrow. Don’t wait for these issues to directly impact your organization: take steps today to safeguard your business and find a path forward.
