Events that unfolded in 2016 are likely to continue to affect senior level decision-making processes in the foreseeable future as the global economy moves toward a period of heightened uncertainty.
To the surprise of no one, political risk analysts predict that uncertainty created in the wake of electoral surprises in the US, Britain, and elsewhere, will give executives and investors reason for pause in 2017. The Eurasia Group writes that this sentiment is not simply a dip in confidence, but a full-fledged crisis – a geopolitical recession. For several years The Eurasia Group has argued that we have been trending towards a G-Zero world, one without a global leader. Across 2016 anti-globalist sentiment finally led to electoral victories that have created both political uncertainty and fear of political retrenchment.
Corporate boards and global executives appear to have incorporated these risks into much of their own decision-making. Protiviti and North Carolina State University teamed up to survey this trends within the corporate world in regard to executives’ views on risks for the upcoming year. Although their top ten risks did not show any surprises, looking forward, business leaders report that they expect these risks to have a more significant impact on their firms than in years past.
General rise of uncertainty in the globalised economy
This reflects a general rise of uncertainty across industries and geography. While some may point to the financial and economic nature of these risks, ambiguity in political decision making and public policy are their key animating force. It is worth noting that the top two areas of concern in the Protiviti report – economic conditions in core markets and potential regulatory changes within those markets – are directly impacted by policy choices. Both of these risks are expected to have a ‘significant impact’ on operations.
A second, and growing set of concerns for executives relate to cyber security and data protection. These perennially rank among the top ten risks, but the perceived impact of risk events in both of these areas is increasing. In the past year the Democratic National Committee, in the United States, and Yahoo!, among others, have suffered significant breaches from state-sponsored hackers, bringing data protection into the realm of political risk. This only amplifies continued concerns about the security of data and IT systems that are fundamental elements of corporate growth strategies.
In addition to the four risks – economic conditions, regulatory change, cybersecurity, and data privacy – mention above, business leaders highlight disruptive innovation, leadership succession, market volatility, employee resistance to change, and customer loyalty as their top risks.
Wider implications for business leaders
As operating environments become riskier, the implications for executives often become clear: proceed with caution. The standard course is to slow decision-making to ensure that risks are adequately mitigated and plan for an increasingly broad set of scenarios when making both tactical and strategic decisions. Investors are now pushing Boards to get involved in these efforts, further slowing corporate processes that have had the brakes on for years.
Unfortunately, this has a habit of creating a self-fulfilling prophecy. Organizations that proceed with caution move slower, take longer to make decisions, and place fewer bets across the year. Each decision, each bet, becomes a larger share of their operational portfolio making each one individually riskier. The cycle creates a culture of risk aversion that can be difficult to break.
However, the nature of risk contains an upside as well as a downside. Opportunity is inherent within risk, and political risk is no different. When business leaders note that the economic conditions and regulatory regimes in their operating environments are becoming riskier, they implicitly endorse that greater, if less obvious opportunities are available. In an environment where multinationals continue to retain cash reserves of near record levels, and low-interest rates keep cash cheap, opportunities abound. Organizations that are willing to take on risks may be able to lay the groundwork for long-term value creation – they may just have to expand their opportunity set and look beyond what have been traditional bets for growth.
