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Europe’s refugee crisis, with its geopolitical ramifications, is a poignant reminder of how political risk is changing the business environment.
Corporate longevity is a function of how companies navigate risk — political and financial. Traditionally, political risk is about threats that are considered outside the control of businesses, such as regime change, terrorism and nationalisation. But the concept is broader: today’s political risk encompasses societal risk. Seen this way, it becomes predictable and thus manageable.
Companies need to consider the causal factors behind political risk. These include corruption, rocketing food prices and the failure of governments to reinvest the benefits of business revenues in social infrastructure. Companies also need to monitor volatility in the business environment — the prolonged uncertainty that precedes and follows political risk events such as the toppling of leaders, policy shifts, lack of rule of law and contract review.
As we have seen with the Arab uprisings populations are increasingly willing and able to depose governments, whether by elections or demonstrations.
Not all emerging economies present high degrees of political risk. Risks are greatest where significant foreign direct investment and pervasive youth unemployment exist alongside endemic corruption and the failure by governments to provide basic services such as health, education and sanitation. Such societal risks — precursors to political risk — are identifiable and measurable.
Emerging economies — where companies need to be to grow markets, source materials and achieve value in supply chains — are particularly vulnerable to political risk, because they have a growing middle class, digital inclusion and rising unemployment among their educated youth, who protest when growth is not trickling down. But that in itself is not sufficient to catalyse political risk.
Political risk heats up in a cauldron of popular discontent, labour protest and human rights violations by states against their own people as well as censorship and violent repression of dissent. Therefore companies need to monitor not only societal risk but also government response.
Unsafe workplaces and weak regulatory frameworks are further risk factors, as underlined by the collapse in 2013 of a garment factory in Dhaka, Bangladesh, in which more than 1,100 workers in multinational supply chains died.
Business needs to address these problems in its own operating environment. For example, if there is a flood or a spike in food prices, successful businesses have shown it is better to feed employees than lose working days. That may sound radical, but it is what mining and oil and gas companies with long histories in high-risk countries have done for years — investing in schools and roads, buying regionally and employing locally. They know that, in the long term, they are part of the societies in which they operate.
Where governments are weak, preoccupied or failing, business has a greater social responsibility. Political risk is too unpredictable to leave to chance and too costly to address after the event — as illustrated by Egypt, where many global companies were caught unawares.
The most sustainable businesses are those that recognise and take seriously societal risk and corporate social responsibility. They have built up teams of social and political scientists who can analyse and navigate the danger areas. Corporate longevity is about anticipating political risk and resilience. That comes through understanding and managing the societal risks that are its causes and consequences.
Alyson Warhurst is the former chief executive of risk analytics business Maplecroft (now Verisk Maplecroft) and a former professor of strategy and international development at Warwick Business School
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