How smart companies respond | KPMG | GLOBAL
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How smart companies respond

How smart companies respond

Appoint a chief geopolitical officer

A CGO is a member of the senior leadership team with single-point accountability for managing the impact of politics on the company's business interests. They work closely with functional experts (particularly government/public affairs teams) and other executive portfolios (particularly Strategy & Risk) to maintain a whole-of- company view.

This is a job for the CEO personally. In times past, having a dedicated government/public affairs team was in itself a sufficient response. Now it is simply the start. Those professionals are highly effective when issues are well defined, lines of engagement with government are clear and open, and government counterparties have capacity. Issues of industry regulation and technical operating standards still largely present this way.

Conduct a geopolitical stress test

Getting a handle on current levels of activity and exposure to geopolitical developments is an important building block, especially if this hasn't been a subject of active thought for the CEOs. One way to do this is to conduct a geopolitical stress test on the strategy and planned initiatives.

For example, virtually every company would be gravely affected by a global outage of transport or communication networks, which is not a far-fetched scenario in a time of heightened geopolitical tension. A stress test could help evaluate the impact of such disruption. A CEO could take their company's 3-year business plan and model the following scenarios (individually or collectively) to get an idea of their exposure and resilience.

Implement a geopolitical forecasting and monitoring solution

For companies to truly feel like they have a handle on geopolitics, they should go beyond relying on mass media for information and invest in specialized geopolitical forecasting and monitoring capabilities. It can be tempting to feel covered on the basis of easy and costless access to news coverage and analysis. However, it is precisely the 24/7 news cycle and the over-abundance of current affairs coverage and commentary that makes it more important to be discerning.

In a noisy world, it can be harder to separate fact from fiction, sentiment from strategy, and decisions from drama. However, there are tools available to help companies navigate this landscape in real time, and support available from specialized teams of political analysts focused on covering politics in real-time and translating those into business implications.

Read the full report: The CEO as Chief Geopolitical Officer (PDF 785 KB).

Evaluating the company-wide impact of geopolitical risk

Area of disruption Examples

Financial model

Key fundamentals of the financial model — interest rates, tax rates, tariffs etc. — could face significant change following political or regulatory shifts.

  • 2x increase in operating expenditure of transacting across borders (financial hedges, professional fees, regulatory compliance, travel costs and the like). Consider that such a doubling of expenditure is in the ballpark of what many businesses contending with Brexit are accounting for.
  • Monetary measures or geopolitical tensions leading to large swings in global currencies, stock markets or commodities.

Business model

The attractiveness and feasibility of aspects of the business model, such as geographical footprint, product attractiveness and customer profile, may also be challenged by geopolitics.

  • The loss of access to a key geographic market, perhaps as a result of sanctions, damaging political interference or even loss of cross-border passporting arrangements.
  • Restrictions imposed by new product regulation or issues product/ material supply chains.
  • The impact of a significant deterioration in customer sentiment.

Operating model

Key components of the operating model — core processes, technology and operations infrastructure etc. - could be significantly destabilized by a geopolitical event.

  • 72-hour outage of information backbone (website, online gateways, encrypted messaging services and similar). For reference, if a major cloud provider went down in a cyber-attack, the economic damages are estimated to be similar in scale to that of a physical event such as Hurricane Sandy or Katrina (an estimated US$50-120 billion3).
  • Zero cross-border travel for one week (no plane, train or road journeys across international borders). Consider for example, the very real threat of an imminent global flu pandemic4 or perhaps the impact of a sudden change in a country’s immigration restrictions or governments’ travel advice by country.
  • Double transport time (and/or cost) of transporting goods (sea, air, road, rail). Such an outcome is wholly plausible in the Strait of Hormuz, through which one-fifth of global oil is transported, given current geopolitical tension in the region.
  • Potential restrictions on the movement of people which may impact staff availability in scenarios like Brexit.

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