Business leaders and experts gathered in London to discuss political risks at the Financial Times Political Risk Summit on March 1.
Businesses today face a range of risks and uncertainties, with the international commercial landscape more unpredictable than ever. In particular, political risk is on the rise and companies must better understand and mitigate such risks in the countries and industries in which they operate.
On 1 March, hundreds of business and risk experts gathered at the 2016 FT Political Risk Summit, which Global Risk Insights was proud to attend as a supporting partner, to discuss the challenges and uncertainties they face. Here are some of the key takeaways.
Key political risks and security threats
Businesses face both old geopolitical risks and emerging socio-economic risks. Conflicts in Africa and the Middle East, the rise of terrorism, growing territorial disputes, an unending refugee crisis, and an increase in failing states are just some of the geopolitical risks multinational companies must mitigate today.
These risks are not new, of course. But they have unleashed a new wave of social and political unrest, with a decline in trust, rising protests, and an alarming upsurge of fringe political parties being just some of the new socio-economic risks now emerging. This suggests that businesses now face a combination of old-style risks and newly emerging challenges.
1) Domestic politics will pose significant challenges to business environment
The slowing growth in China was a hot topic among many attendees. However, crises are usually followed by reform. Cho Khong, chief political analyst of Shell International, argued that China recognises the need to reform, but also needs to balance stability and economic growth.
Experts were also concerned with China’s foreign policy direction, which has taken an increasingly aggressive bent since president Xi Jinping’s took office; this is in stark contrast to Deng Xiaoping’s, who chose to keep a low profile while targeting economic growth. Former head of MI6, Sir John Sawers, raised a common concern about whether China would continue its peaceful rise, and argued that, so far at least, China has managed territorial disputes with a mixture of skill and aggression.
With the US election in full-swing, the possibility of a Donald Trump’s administration, a nightmarish scenario for many, also came up several times during discussions.
Business leaders, like everyone else, are trying to figure out what makes Trump appealing to voters. Cho Khong said he believed Trump’s ascendancy represents something that many have ignored for too long. People have become disfranchised; not only are they disconnected from growth, but and wages have stagnated for two decades. Increasingly, elites are being questioned by those not benefiting from growing economic growth. This has been a central plank of Bernie Sanders’ campaign as well.
Brexit was understandably another hot topic. Business leaders at the summit share the consensus that Brexit will increase uncertainties to business and continuity in regulation would be crucial if the UK leaves the EU.
2) Is another economic crisis coming?
Steve Keen, head of the School of Economics, History, and Politics at Kingston University, claimed a precursor to economic crisis is high private debt of GDP (defined as above 8 percent of GDP) and years of high credit growth. This is happening in China, he said, but Spain, France, Finland, Korea are also at risk having reached debt to GDP ratios in excess of 175%.
3) The EU migration crisis is still a major concern
When comparing the level of uncertainties in the EU, India, and China, some business leaders saw the EU as having a much higher level of instability due to the migrant crisis.
Though business leaders think the risk of the refugee crisis leading to the breakdown of Schengen’s agreement being low, it would come as a huge blow to the EU economies if it did indeed happen.
4) Business are becoming more vulnerable to cyber-attacks as dependence on ICT systems and the cloud increase
Infrastructure and regulation have not kept up with the growing challenges that have come from the internet. There is a great needed for the government and companies to work together to tackle this issue, experts said.
This is particularly so given that the cost and risk to cyber criminals is low. Meanwhile, many businesses still fail to recognize these cyber risks, with cyber experts are calling for a better risk measurement and insurance policies to cover cyber-attacks.
5) Operational risk factors across different industries
Multinational companies often operate in a complex environment and face operational risks such as corruption, governance, and transparency.
But some businesses are also prone to added uncertainties due to the nature of their business. Pharmaceutical companies, for instance, face animal rights issues, espionage, and knock-off drugs which are often developed by organised crime and terrorist groups. Mining industries, meanwhile, suffer from suspicion from local NGOs, meaning the key is to manage expectations and legitimacy.
Across various industries, business leaders said they believed transparency can reduce espionage risks, and corruption. This should be a long-term goal or objective according to Robert Court, former head of Rio Tinto.
Measuring, mitigating, and managing risks
Challenges of defining and measuring political risks
While measuring political risk is difficult, there are certain metrics by which to quantify these risks. The insurance giant Zurich, for example, assesses the rule of law, corruption, transparency, and international arbitrations when it comes to doing their own country risk analyses.
Moreover, a major benefit of measuring political risk is it pushes private investors to have conversations with key actors such local community and local NGOs. This can often lead to more sustainable and less risky business plans.
Some traditional risks are easier to measure – and insure – than others. Foreign exchange rates, for instance, are not as visible, though they still pose a major risk to international businesses, especially since this is not something commonly insured by political risk insurers. Businesses therefore need to have a comprehensive risk assessment strategy to cope with a range of risks.
Always have effective communications with the government
Effective communications with governments is crucial to building companies’ trust and credibility.
Helen Kennett of Rolls-Royce said it was often compulsory to cooperate with government. MIGA’s Keiko Honda similarly claimed that governments are more likely to help is likely to be successful and will have a positive discernible impact to the local population.
This underlines the importance of corporate social responsibility negotiating and implementing large deals, especially in foreign countries.
A proactive and comprehensive contingency plan
Companies often operate in high risk environments, where security threats arise quicker than initially anticipated.
Stuart Tootal, chief security officer of Barclay’s, was surprised by the rapid deterioration of the situation in Egypt during the Arab Spring, but said this highlighted the importance of planning for political contingencies; this was critical to successfully evacuating their staff during 2011’s Egypt crisis.
Sound contingency plans and good working relationships with key decision-makers and security personnel remain as important as ever.
These are just some of the main takeaways from the FT Political Risk Summit. For more, visit Global Risk Insights Twitter feed for quotes from experts and live analysis.