The CEO Imperative: Are you making political risk a strategic priority? The CEO Imperative: Are you making political risk a strategic priority?

Authors
Oliver Jones

EY Global Business Development, Markets and Insights Leader; EY-Parthenon Global Government & Public Sector Leader

Passionate about providing outstanding support to governments and businesses. Deeply committed to excellence in public policy. Team builder. Mentor. Flexible worker. Loving husband. Father of three.

Jon Shames

EY Global Geostrategic Business Group Leader

Helping businesses understand the implications of geopolitics. EY lifer (35 years!) Washington Capitals fan. Competitive tennis player and bad golfer. Arts and travel lover. Father, husband and son.

Courtney Rickert McCaffrey

EY Global Geostrategic Business Group Insights Leader

Geopolitical analyst and strategist. Creative methodologist. Proud feminist. Passionate about generating insights to help executives make better-informed decisions.

5 minute read 13 May 2021

Political risks pose business challenges according to EY's Geostrategy in Practice 2021. Here’s how proactive risk management can fuel growth.

In brief
  • While leaders are increasingly focused on political risk, they’re less confident in their ability to manage it.
  • Leaders need robust, proactive approaches to identifying, assessing and mitigating the potential impact of political risk.
  • Five key recommendations emerge from the EY Geostrategy in Practice 2021 survey to help CEOs make political risk management a strategic priority.

The COVID-19 pandemic has dramatically tested companies’ risk-management capabilities. More than 90% of executives in the EY Geostrategy in Practice 2021 survey (pdf) said their company had been impacted by unexpected political risks in the past 12 months, with governments shifting policies and regulations to respond to the health crisis. Yet about a third of leaders were surprised by emerging political risks about half the time, meaning when it came to successfully identifying events impacting them, they did no better than a coin toss.

The need to better anticipate and mitigate risk is why 94% of executives report moderate or significant changes in the past year to their organization’s political risk management approaches. That’s a good thing. Yet while leaders are taking action, the recent unexpected and unprecedented impact of political risk has left them less confident about their company’s ability to manage it. Before the pandemic, 74% of global executives were highly confident about their company’s ability on this front; today, only 55% are (see figure 1).

This points to a strategic need to improve political risk management – particularly since 92% of global executives expect political risk to remain at current heightened levels or to rise further in the coming year. The Geostrategy in Practice survey results suggest companies taking a more proactive approach to political risk management are more confident in their ability to manage risk and make bolder strategic decisions.

We’re only too aware of the challenges confronting CEOs, and reluctant to put yet another task on your agenda. But the past year has underscored the challenge presented by political risk, which is why it’s part of our CEO Imperative Series, designed to help you reframe the future of your organization with insights providing critical answers and tangible actions. So, how do you put geostrategy into practice at your company? Five key recommendations emerge from our survey results.

1. Identify and collect quantitative political risk indicators

Only a third of companies regularly collect quantitative political risk data. Among executives that prioritize improving political risk identification, almost half point to quantitative data as key. While political risk will always involve qualitative analysis, companies should do more to collect and integrate quantitative indicators into their political risk identification and monitoring systems. Quantitative indicators such as corruption indices and broader country risk ratings will expand companies’ efforts to identify new and emerging risks and monitor the political risk levels in key markets. And such indicators will also be useful in modeling the potential impacts of political risk on the company, incorporating political risk into enterprise risk management (ERM), and assessing the political risks associated with strategic decisions such as market entry and exit.

2. Develop or acquire the ability to assess the business impact of political risk

More than 90% of global executives expect political risk to hit their company’s growth and investment and operations and supply chain, and about three-quarters expect revenue impact (see figure 5). Executives also point to assessing the impact of political risks as the most important area of improvement needed to overcome challenges and seize opportunities associated with political risks. Companies should invest in political risk impact assessment at the functional or business unit level and ensure that these assessments are shared in aggregate with the C-suite on a regular basis. These functional or business unit impact assessments should also inform an enterprise-wide assessment of the potential political risk impacts on a regular basis. Both levels of assessment should incorporate the quantitative political risk indicators that the company monitors into their models and to report impact assessments in a tangible way (e.g., financial impact on revenue) to the C-suite and the board.

3. Integrate political risk into ERM

Strikingly, only 23% of global executives say their company integrates political risk management into broader risk management on a regular or proactive basis. Companies should integrate political risk into their ERM process to gain a full view of the outside risks they face. Such integration can be particularly impactful if it leverages quantitative political risk identification outputs and tangible estimations of political risk impact. The ERM team responsible for political risk should seek to target financial and operational hedging and other risk strategies that foster resilience, minimizing the impact of downside political risk events while also proactively identifying strategic opportunities the company could pursue related to upside political risk events.

4. Engage your board and C-suite to incorporate political risk into strategic planning

As revealed in the 2021 EY Capital Confidence Barometer, geopolitical challenges are forcing about 80% of companies to alter their strategic investments. Companies should ensure all of the insights and risk management activities in the steps above are translated into business strategy. This should include not only a regular assessment of how political risk developments affect current strategy, but also the proactive inclusion of political risk analysis in M&A, market entry and exit, and international footprint decisions – as well as in forward-looking strategic planning.

The C-suite and the board should receive political risk training and engage with external subject matter professionals on a regular basis. They should then be actively involved in assessing political risk in strategic decisions to demonstrate there is buy-in from the top on the strategic importance of incorporating political risk into company culture.

5. Set up a cross-functional geostrategic committee

Political risk governance appears to be siloed in many companies. Only about 40% of companies use a committee to govern political risk management, indicating that responsibility in most companies resides within a single function or individual. Companies should establish a cross-functional geostrategic committee including representatives from across the political, operational and financial aspects of political risk management. Country and functional teams are more aware of local political risks but there often isn’t an effective aggregation of such risks at the global level. So committee members should come from both the C-suite and relevant functions or business units. The committee should meet regularly to discuss the political risks the company faces, how and where those risks are likely to impact the business, and what is and should be done to manage them. This committee should also frequently report to the board of directors.

Companies taking these steps will develop a more proactive, comprehensive and balanced approach to political risk management. And taking more proactive actions to identify, assess and manage political risk will improve executives’ confidence in their ability to manage it, providing the confidence to pursue bolder, political risk-informed, growth-oriented strategies.

Summary

Political risks are rising and will continue to have impact across the enterprise. But political risk management is reactive and disconnected from ERM in most companies. Executives should take a more proactive, cross-functional approach to political risk management to support bolder strategies.

About this article

Authors
Oliver Jones

EY Global Business Development, Markets and Insights Leader; EY-Parthenon Global Government & Public Sector Leader

Passionate about providing outstanding support to governments and businesses. Deeply committed to excellence in public policy. Team builder. Mentor. Flexible worker. Loving husband. Father of three.

Jon Shames

EY Global Geostrategic Business Group Leader

Helping businesses understand the implications of geopolitics. EY lifer (35 years!) Washington Capitals fan. Competitive tennis player and bad golfer. Arts and travel lover. Father, husband and son.

Courtney Rickert McCaffrey

EY Global Geostrategic Business Group Insights Leader

Geopolitical analyst and strategist. Creative methodologist. Proud feminist. Passionate about generating insights to help executives make better-informed decisions.