Risky Business

by Shane Fitzgerald

In my last post, I argued that the business landscape in Asia is mined with political risks. This post will consider ways that companies operating in the region can manage those risks.

All businesses factor the political environment into decisions to some degree. But because political risk is seen as amorphous and intangible, most companies lack a proper framework for understanding it. Yet carefully comparing variations across time and across political environments offers a way of gauging the degree of intensity of different risks. Setting these results against a company’s operational profile offers a way of understanding its overall exposure.

These are not easy things to do. There is always a matrix of risks and some will matter more to some companies than to others. Some factors can be measured quantitatively but non-quantitative issues such as social cohesion and institutional integrity must also be accounted for. Effective analysis therefore depends to a large degree on the careful judgment of analysts and decision-makers.

Perhaps the most important thing to remember is that we cannot predict political events with any degree of reliability. We can however monitor risks, mitigate them, and in so doing be better prepared to respond to issues as they arise.

Ian Bremmer, head of the Eurasia Group consultancy, says that companies operating in emerging markets need to constantly consider the potential for political ‘shocks’ and should try to estimate three things: How likely is it that a shock will occur? If likely, when will it probably occur? How high are the stakes if it does?

We can attempt to answer these questions in a number of ways. There is a wealth of up-to-date and decision-relevant data on almost all countries and regions available online, either through traditional news media or from governmental, INGO or commercial sources. Embassies spend a lot of time monitoring and evaluating political developments in their host countries and can be invaluable sources of information, as can chambers of commerce and other professional networks. Many of the largest multinational corporations conduct their own political risk analysis in-house, though it is increasingly common for companies to outsource this task to specialized consultancies, each of which has its own methodology for evaluating risks.

Risks should be monitored everywhere, but if a market presents significant threats to a company’s business, then they must also be actively managed. Different political risks can be mitigated in different ways. Recruiting local partners, carefully monitoring and lobbying important legislation, and cultivating contacts in government and in opposition will all help to minimise policy risk, as well as the risks presented by countries with opaque, unstable or corrupt governance structures. Investment risk can be hedged by diversification, i.e. by locating essential facilities in more than one state or by developing a number of routes to market, or by purchasing investment insurance. Security risk can be minimized by regular threat evaluations and robust procedures for protecting company personnel and assets.

While they are difficult to manage, it is important to also think about risks faced by suppliers and customers. For example, recall the series of devastating natural disasters that struck the Asia Pacific region in 2011. These included widespread floods in Australia and Thailand, an earthquake in New Zealand, and an earthquake, tsunami and nuclear disaster in Japan. The economic costs of these tragedies were compounded by new risks and vulnerabilities arising from the growing complexity of modern economic infrastructure. The supply chain network in Asia has become heavily reliant on international trade in intermediate goods to the extent that incidents in one country quickly affect manufacturing capacity in another. Super-lean supply chains may deliver immediate efficiency gains but they are very likely to fail when interrupted by natural disasters or other shocks.

In this context, geographic diversification of operations, prudent stockpiling of inventory and multi-sourcing from different suppliers is essential. Business continuity plans can help managers to evaluate and ensure the resilience of their supply networks. Tools such as the United Nations Global Assessment Report on Disaster Risk Reduction provide a resource for understanding and analysing disaster risk at global, regional and national levels. Companies should be aware of disaster risk trends in given markets, the approximate exposure of their customers and suppliers, and the disaster management capabilities of governments and other relevant agencies. Of course, these imperatives apply to political shocks as well as environmental catastrophes.

Within companies, vertical and horizontal communication are crucial elements of effective risk management, political or otherwise. Management’s preferred levels of exposure must be properly communicated to in-country teams, allowing for the fact that perceptions of risk and attitudes to uncertainty will vary across cultures. Information about political risks and the company’s responses must be continually escalated as well as shared across departments so that employees can learn from each other and so that, where possible, risks can be minimised or spread.

All of the above is easier said than done. Yet, however difficult the task may seem, incorporating political risk into corporate thinking is necessary if we want to create businesses that are robust and resilient and that can even thrive on the volatility of a world we don’t understand.

This article first appeared on the Farmleigh Fellowship 2012 site. Access the original here.