When companies plan for the future they look at various potential downsides, which include market, operational and credit risk. They could also look at the regulatory side, where any structural change can take place that can disrupt the apple cart. But does one ever look at political risk, which has grown in importance in recent times? This is where Condoleezza Rice and Amy Zegart add value in their book titled Political Risk. Rice is better known for being the former security advisor and secretary of state of the USA for close to a decade. But we get to know that she has been an academic with Stanford University while Zegart also has the Stanford badge, besides working with McKinsey. With these credentials and experience, we can expect something really deep and exciting when we turn the pages.
The book is filled with real stories of how political risk has come in the way of operations of companies and we in India can have our own experiences to share under these various headings. The authors take us through the various kinds of risks that come under the political umbrella and then provide a textbook-like approach on what companies should do to mitigate these effects.
Let us look at the five levels of action generating political risks. The first is individuals, which now include Twitter users and activists who can put pressure on companies. Second are local organisations, which include political groups that can create problems for business with their restrictions. Third are governments at the centre where any change in policy on, say, allocation of natural resources can upset the plans of companies who have planned their strategies based on a certain existing dispensation. Fourth, transnational groups such as activists, terrorists or hackers who can upset corporate plans.
The authors play around 10 kinds of political risk which are evident today that have a bearing on the working of companies. These include geopolitical wars and internal conflict to begin with. Third are radical changes in laws and one can remember the famous decision taken by the Janata government post 1977 to ask multinationals like IBM and Coke to leave India. This shook the MNCs in general as two companies had to exit the country.
Fourth, there are cases of breaches in contracts which are common in several African countries where bribes have to be paid to keep the contract running, especially when regimes undergo a change. Fifth is corruption, which is a hassle for companies of foreign origin that are forbidden by domestic law to pay bribes in other countries. Sixth, extraterritorial overreach, like sanctions for US companies operating in Iran would be a major blow for companies when there is a sudden change of stance by the President leading to heavy losses. Seventh relates to natural resource manipulation; eighth is collective action under activism. Terrorism and cyber threats are two other risks that the authors highlight.
The important thing is that companies should be prepared for such risks and for that we need to first recognise them. Often companies live in denial and always say that it is not important because the business is not vulnerable, especially if there are no global operations and business is purely domestic. But as has been explained, activism and change in policies are big risks which can pressurise companies to a large extent. Therefore, step one is to understand such risk and keep updating the risk appetite. Further, this has to be communicated to the management and one should avoid a herd mentality where everyone nods their assent to what CEOs say, which happens in all companies. There has to be a set of dissenters or people who think negatively so that these views are shared by the management, which can then decide whether they are important or not.
While the authors do get into the details, it is important for companies to take cognisance of these risks and include them in a risk-mitigation strategy. This is a book for all CEOs, who should list five such risks that their companies could face on various scores.
No comments:
Post a Comment