Board directors may feel they have enough to worry about with the short-term economic risks faced by their companies. There are plenty of these around, including the impact of low interest rates, growing unemployment and stuttering growth across Europe, slowing growth in China and energy price fluctuations.
But many of the longer-term risks are geopolitical, and directors need to be aware of these and have plans in place to deal with them. According to the World Economic Forum’s Global Risks Report 2016, three of the five global risks of highest concern over the next 18 months are geopolitical:
- State collapse or crisis
- Interstate conflict
- Failure of national government
Geopolitical risk could also include the fallout from the UK’s decision to leave the European Union (EU). This is having short-term effects in the UK, the rest of Europe and beyond, such as currency fluctuations and lower growth, but the longer-term political and economic consequences will be harder to predict. These include: decisions by large companies about business and investment strategies, the exit terms negotiated between the UK and the EU, the effect of Brexit on other EU trade deals, and the potential for a further independence vote in Scotland.
The UK referendum was part of a wider trend that has seen the rise of nationalism in a number of countries in Europe and Asia. It was also a contributing factor in the result of the US presidential election, which may have significant consequences for the global economy. The new administration’s priorities are likely to include tax policy and reform, infrastructure spending, global trade agreements and financial regulatory reform.
While negotiating these changes may be challenging for some companies and their boards, it could provide others with opportunities. Either way, boards need to be aware of the risks and be prepared to question management assumptions if they appear overly optimistic.