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Political risk: Time for a new approach to an old problem?

Political risk: Time for a new approach

Most companies have no desire to enter the political arena. But with political risks elbowing their way back onto board agendas, perhaps the time has come for businesses to explore new approaches to managing the increasingly serious area of risk.

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Partner and Head of FS Consulting and Risk Consulting

KPMG in the UK

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Political risk: Time for a new approach to an old problem - Business globe

Ask any Chief Risk Officer (CROs) what keeps them awake at night, and many will point to cyber-attacks or other digital threats that barely existed a decade ago. But the past two years have also seen the resurgence of something that has been disrupting business since the days of Julius Caesar - political risk.

Businesses may no longer need to worry about the whims of monarchs and emperors, but few would deny that political risks have been climbing steadily since the Brexit vote. These risks reached a new level of intensity recently, as political chaos in Italy created fresh instability in Europe and the announcement of US steel tariffs raised the prospect of a potential trade war.

In short, hopes that the geopolitical volatility of 2016 was a passing phase have been dashed. If anything, political uncertainty looks increasingly like the ‘new normal’, with unilateral decisions by national and even local actors throwing out ripples that can disrupt businesses on the other side of the world.

So this seems like a good moment for companies to re-examine their approach to geopolitics. Do firms have a clear view of their political risks? How are they factoring these risks into their modelling and planning? And, is this process actually helping them to make practical improvements to operating models?

Many companies rely on specialised suppliers for geopolitical information. For those that can afford it, high quality, tailored insight can be a valuable resource. But most firms have a limited budget for such material and many simply rely on the media. At a time when foreign relations are so unpredictable, this leaves a lot of business leaders with little more geopolitical insight than the average person on the street.

In any case, there is a big difference between identifying political risks and applying those insights to business strategy. How should firms use risk reports to inform their decision-making? Good scenario planning is time-consuming and expensive. And even those with deep expertise in modelling political risks are not immune from unexpected hurdles. BP learned this from its partnership with Rosneft and Total is discovering this over its investments in Iran.

These difficulties mean that geopolitical risks can seem too hard to manage. It’s no wonder that many businesses shrug their shoulders, preferring to focus on risks they can actually control – such as protecting against data breaches.

That’s a perfectly logical approach. But perhaps businesses should consider taking a more proactive attitude to political risks. Firms are understandably wary of alienating customers, but a policy of silence is not entirely without its risks – as the persistent uncertainty over post-Brexit access to markets, labour and supply chains shows.

So while I wouldn’t suggest businesses should state political preferences, being clearer about the scenarios they are planning for (and their possible consequences) could make a valuable contribution to public debate. Companies speaking together, or through industry bodies, would make the commercial impact of political decisions even clearer. I can’t believe that any business is enthusiastic about the possibility of a trade war. Being willing to say so might make one less likely.

Most companies have no desire to enter the political arena. But with political risks elbowing their way back onto board agendas, perhaps the time has come for businesses to explore new approaches to managing this age-old, and increasingly serious, area of risk.

You can see all of Tim's blogs here

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