What is geopolitical risk, and why is it important?

American insurance company WTW describes it as the “number one global corporate risk”, and this is likely to resonate more with directors in this uncertain decade. 

Boards worldwide follow the same worrying news stories, from conflict to trade wars to political polarisation. Rarely do these events mean good news for businesses. 

As a result, boards should ask themselves important questions about geopolitical risk to ensure they are prepared. 

Let’s dive in:

It’s the collection of risks facing companies that stem from conflict or other tensions worldwide. 

If you’re a corporate leader, you’re likely to follow current events closely, so you should automatically know how broad these risks can be.

War, the threat of war, trade wars, blockades, sanctions, political polarisation – all are geopolitical risks that might affect a company’s performance. 

And remember, they don’t have to be global to be impactful. Even localised examples of the above could be enough to threaten a company.

Sometimes, these risks can emerge slowly; these are easier to plan for. Other times, they can occur suddenly, taking markets and stakeholders by surprise, spurring panic and worsening a bad situation.

Examples include: 

• The build-up to, and the onset of, the war in Ukraine. This event caused significant shifts in European business behaviour, especially banking, as Russia and its allies were closed off from doing business with the West. 
• The supply chain/cost of living crisis; caused by a combination of the Ukraine war, international trade standoffs and COVID-recovery shortages. 
• Brexit. Most of the main negotiations are now complete, but this major event created vast amounts of uncertainty, significantly impacting small and large businesses across European borders. 

Multiple serious dangers. It’s not considered the “number one corporate risk” for nothing. 

If geopolitical risk turns into reality, it can seriously harm a company’s business through increased costs, loss of personnel, limitations on trade, entire markets being cut off and stakeholder panic. 

Companies could rapidly land in highly vulnerable situations if any of these issues begin to surface. 

Even if they don’t surface, and the company avoids the worst geopolitical risks, it can still seriously harm innovation (according to the Harvard Business Review). This might not be a problem in the short term, but it can make the business far less sustainable in the long term.

The biggest trick in managing geopolitical risk is understanding it. There’s usually a lot to unpack. 

• Understand your company. Know its mission, market and your role in safeguarding them. Seek training in governance if you want to improve your skills in this area. 
• Stay tuned to news developments. Anything and everything that could impact your business’ performance should be monitored. Ensure, as far as possible, that your company is never shocked by a news headline.
• Identify, assess, and quantify your geopolitical risk. The same is true for any corporate risk. 
• Ensure your company strategy respects geopolitical risk and builds the company towards a point of resilience. For example, if your raw materials come from a nation where severe political violence may occur, consider sourcing elsewhere to mitigate the chance of your entire supply cutting off overnight.