<< view all Insights

Companies Ignoring Politics Invite a Crisis

When President Trump faced the General Assembly of the United Nations in September and declared: “We reject the ideology of globalism and accept the doctrine of patriotism”, he implicitly challenged the business models of the global corporate community.

Since the end of the Cold War, businesses have positioned themselves to take advantage of globalisation, if not driving it, by entering new markets, organizing supply chains across borders, hiring an international workforce, or attracting a global investor community. They have been operating based on the hypothesis that political cooperation would follow the integration of global markets for goods, services, capital, and labour, and that a stable framework of international norms protected by international institutions would provide the rules of the game.

It is too early to say that this working hypothesis needs to be replaced entirely. Political nationalism has gained important ground, but it has not yet succeeded to fully undermine and undo the accomplishments of the liberal order on which globalisation has been built. It is therefore too early to declare the end of globalism. But the needle is pointing to a world in which the nation state and national interests, and the alliances that are going to be built around them, are reasserting their roles as determining actors in global affairs.

The consequences of this paradigm shift are beginning to reflect on the global economy. The IMF’s World Economic Outlook of October 2018 suggests that a sharp rise of uncertainty over trade policy, the possible failure of Brexit negotiations, and geopolitical tensions in several regions have lowered international growth projections for 2018 and 2019, and weakened trade and investment flows, as well as manufacturing activity. The IMF’s Global Financial Stability Report of the same month warns that a further escalation of trade tensions, as well as rising geopolitical risks and policy uncertainty in major economies, could lead to a sudden deterioration in risk sentiment, triggering a broad-based correction in global capital markets and a sharp tightening of global financial conditions.

The intensifying battle between globalisation and nationalism, and geopolitical risk in general, has also shaped the perception of political uncertainty across the corporate community. One survey after another declares that geopolitical instability is top of mind of global corporate leaders and dominating boardroom discussions. Yet, it appears that many companies still believe to be able to navigate a fragmenting global political space rather opportunistically. Few have embraced political uncertainty, and the risks that it might cause, as a strategic challenge.

The consequences of doing so are increasingly troublesome: French cement giant Lafarge has been indicted on terror financing charges in Syria, including eight former company executives. As the relations between the West and Russia worsen, Danske Bank, Denmark’s largest lender, is subject to a profound money laundering scandal involving Russian clients, over which the bank’s CEO had already to resign. Google is facing tremendous headwinds over plans to re-enter into the Chinese market and risk compromising the integrity of the information offered to users on its platforms.

Higher levels of political complexity, and the growing number of cases illustrating how political risks compromise the performance of companies, suggest that companies need to develop a much more strategic perspective on geopolitics and political risks. They are challenged to build their political risk management capabilities, transforming the perception of a diffuse political environment into a strategic perspective on political risk.

As Henry Kissinger once noted: “An issue ignored is a crisis invited.” As politics turns into a dominant component of companies’ operating environments, it would be highly negligent to ignore it.

Dr Sven Behrendt serves as Managing Director of GeoEconomica, a political risk research and advisory firm that deals with the consequences of political and regulatory trends and events for corporate strategy and financial markets. He is the co-Director of the GCSP course, "Geopolitical Analytical Skills for Business Leaders," which will take place in Geneva from 19-20 November 2018.