1 The Blackfish Effect: Twenty-First-Century Political Risk

In April 2013, SeaWorld Entertainment, Inc., was riding high. The American theme park company had completed an initial public offering that exceeded expectations, raising more than $700 million in capital and valuing the company at $2.5 billion. “To many Americans, SeaWorld offers family fun amid penguins and killer whales,” gushed the New York Times.¹ The story ran with a picture of two adorable penguins waddling around the New York Stock Exchange as part of a promotional tour.

Richard Drew, Associated Press

Eighteen months later, SeaWorld Entertainment’s fairy tale had become a nightmare. The stock price had plunged 60 percent and CEO Jim Atchison announced that he was resigning. No adorable penguins this time: Instead, the pictures accompanying the headlines featured a giant orca. Suddenly, SeaWorld’s famed killer whales were killing the company.

Orlando Sentinel, Getty Images

Atchison and SeaWorld were blindsided by political risk. Not just any kind of political risk, but twenty-first-century political risk, where the political actions of small groups, or even lone individuals, supercharged by connective technologies, can dramatically impact businesses of all kinds.

It all started with a Los Angeles documentary filmmaker named Gabriela Cowperthwaite, who liked taking her twins to see the orcas perform at the SeaWorld theme park in San Diego. In 2010, Cowperthwaite happened to read a tragic story about how an orca named Tilikum killed veteran trainer Dawn Brancheau in the middle of a show at SeaWorld’s Orlando park.² Cowperthwaite spent the next two years making a low-budget investigative documentary called Blackfish, which depicted how SeaWorld’s treatment of orcas harmed both the animals and their human trainers. The film cost a grand total of $76,000.³ Released soon after SeaWorld’s initial public offering in 2013, the movie captured the attention of celebrities and quickly went viral.⁴ Actress Olivia Wilde was just one among many who took to Twitter.

Animal rights groups seized the initiative. Online petitions mounted. Public pressure grew. Musical groups including Willie Nelson, Barenaked Ladies, Heart, and Cheap Trick canceled shows at SeaWorld.⁵ Corporations cut sponsorship ties, among them Hyundai, Panama Jack, STA Travel, Taco Bell, Virgin America airlines, and Southwest Airlines, which had enjoyed a twenty-six-year marketing relationship with the theme park and even painted SeaWorld animals on its airplanes.⁶ Federal regulators and California lawmakers jumped into action, investigating safety practices and proposing bills to ban orca breeding in captivity. Attendance at SeaWorld parks declined and the company’s stock price plummeted. While we often caution that correlation is not causation—two trends can occur simultaneously without one necessarily causing the other—the chart here indicates that the relationship between Blackfish and SeaWorld’s trouble was causal.⁷ Just before the film’s release in July 2013, SeaWorld Entertainment stock was $38.92 a share. By the end of 2014, it had plunged to $15.77.⁸ A $76,000 film triggered political action at the grassroots, state, and federal levels that ended up devastating the company. In 2017, SeaWorld’s stock had still not recovered—all because one woman read a story about orcas. This cascading impact of the film has been dubbed “the Blackfish effect.”⁹ ¹⁰

Washington Post

Political risk was once just about the actions of governments, such as dictators seizing assets or legislatures regulating industries. Today, governments are still the main arbiters of the business environment, but they are no longer the only important ones. Instead, anyone armed with a cell phone or a Twitter or Facebook account can create political risks, galvanizing action by other citizens, customers, organized groups, and political officials at the local, state, federal, and international levels. Events in far-flung places are affecting societies and businesses around the world at dizzying speeds. Anti-Chinese protests in Vietnam lead to clothing stock-outs in America. Civil war in Syria fuels a refugee crisis and terrorist attacks in Europe, leaving nations reeling and the tourism industry shaken. Video of a United Airlines passenger being forcibly dragged off a plane in Chicago goes viral in China. A North Korean dictator launches a cyber attack on a Hollywood movie studio.

This is not your parents’ political risk landscape.

Put in the most elemental terms, twenty-first-century political risk is the probability that a political action could affect a company in significant ways.

Twenty-first-century political risk is the probability that a political action could significantly affect a company’s business.

This definition is more radical than it sounds. We chose the words “political action,” not “government action,” to highlight the growing role of risk generators outside of the usual places like capitals and army barracks and party headquarters. Increasingly, political actions that impact businesses are happening everywhere—inside homes, on the streets, and in the cloud; in chat rooms, dorm rooms, and boardrooms; in neighborhood bars and summit sidebars. Companies that want a competitive edge need to manage the risks generated by this widening array of global political actors, from documentary filmmakers to international institutions like the European Union. As we discuss in the next chapter, the Blackfish effect is just one type of political risk. There are many others, from traditional risks like geopolitics to emerging risks that cross borders into boardrooms, like cyber threats and terrorism.

The idea of writing about political risk percolated between us (Amy and Condi) for a while. In 2012, we decided to create a new intensive MBA class examining what global political risks are, how they are changing, and how businesses can best navigate them. Condi, who has been on the Stanford faculty for over thirty years, had recently returned after serving as President George W. Bush’s national security adviser and secretary of state. She had also served on the boards of Chevron, Transamerica, Hewlett-Packard, and Charles Schwab. Amy had recently returned to Stanford as well, joining the Hoover Institution as a senior fellow after spending several years at McKinsey & Company advising Fortune 500 companies and then serving on the faculty of the UCLA Luskin School of Public Affairs. For both of us, the chance to teach together and explore the intersection of global business and politics—twenty years after first sitting in the classroom together examining the changing security dynamics at the end of the Cold War—was exciting.

When we looked for readings to assign, however, we found slim pickings.¹¹ A search of Harvard Business School’s publishing website returned nearly twenty times more materials on global business topics (such as building an effective team or developing an e-commerce strategy) than on the political dynamics that create global business opportunities and challenges in the first place.¹² So we began reading broadly and developing our own framework, cases, and simulations.

As political scientists, we naturally started with politics. Tectonic shifts in geopolitics over the past three decades have dramatically altered the international economic landscape. The opening of China and a market of 1.4 billion people has had the greatest impact. But so too has the collapse of the Soviet Union. Thirty years ago, a conversation on investment would not have included Poland or Estonia, let alone Russia. But today the promise of relatively sophisticated, industrialized economies with educated and consuming middle classes has brought these countries and others like them into view. Markets have been emerging at rates that nobody could have imagined, with the “BRICs”—Brazil, Russia, India, and China—growing at more than 8.1 percent a year even in 2010,¹³ and China poised to become the largest economy in the world in 2019.¹⁴

Even in what was once called the “third world,” opportunities abound. In Africa, Latin America, Southeast Asia, and even the Middle East, middle-class consumers and businesspeople alike are connected to the outside world, looking for products and investment opportunities, a state of affairs that would have been unthinkable three decades ago. In Silicon Valley, technology start-ups are moving into foreign markets at warp speed. As Marc Andreessen, cofounder and partner of one of the world’s most successful venture capital funds, told us, “In the old days, it just would have taken companies a long time to get fully global, so the thinking and planning would have corresponded to the expansion. In the new world, the expansion happens first, whether you want it to or not. And so kind of by definition, the thinking and the planning are lagging… Internet companies might end up with 180 countries before they have 180 employees.”

“Internet companies might end up with 180 countries before they have 180 employees.”

—Marc Andreessen, cofounder and partner, Andreessen Horowitz

These major geopolitical shifts have brought politics and business closer together. When Condi was secretary of state, she spent a great deal of time on economic issues, not just matters of war and peace. She remembers discussing the protection of intellectual property rights with the Chinese, the opening of markets to American agriculture with the Russians and the South Koreans, and World Trade Organization rules and violations with just about everyone. In one particularly surreal encounter with Russian president Vladimir Putin, the subject was not ballistic missile defenses or NATO expansion. It was pigs. The Russians were putting up trade barriers to U.S. pork products because of professed concerns over trichinosis, a parasitic disease caused by undercooked meats. (Many U.S. producers believed that Russia’s food safety restrictions were based not in science, but trade—intended to protect Russia’s domestic pork industry.)¹⁵

“You wouldn’t believe it,” Condi reflected. “We spent an hour, an entire hour, on pork. I looked down at my talking points from the United States trade representative. They said, ‘In thirty years, the United States has had only a handful of cases of documented trichinosis.’ Putin kept going on about how Russians don’t cook their pork as much as Americans do, which is why the trichinosis risk is higher. And we had this long discussion of cooking habits in Russia compared to Alabama, where I’m from.” The meeting captured an emerging reality: International security challenges were no longer so distant from economics. With the Cold War’s end, even between Russia and the United States, business and politics had become more tightly intertwined.

Of course, markets have never been just markets, sitting out there in the world, isolated completely from politics. Markets are created, molded, and constrained by rules, norms, and institutions in the political sphere. Trade regimes, sanctions, national laws—these things are highly contested and determine what playing fields exist, who can play on them, and how level they are. It matters whether you are operating in India, or China, or Brazil, or the United States. But globalization and the end of the Cold War have shrunk the distance between markets and politics just as they have diminished the distance between producers and consumers.¹⁶

In class, Condi taught our students about how political institutions at the local, national, and international levels—including the United Nations—channel conflict and cooperation and often inject high levels of uncertainty into business decisions. Amy, who has written three books about U.S. intelligence challenges, taught about how the security landscape was changing, from a half-century of superpower conflict to a more uncertain world of rising states, declining states, weak states, failed states, rogue states, and nonstate actors. She was also struck by how many leading businesses were developing their own intelligence threat assessment capabilities to deal with this new security landscape. Companies from consumer products manufacturers to law firms to high-tech firms were creating in essence mini-CIAs to assess global political trends and how they might pose physical, business, and reputational risks to a parent company.

We have been teaching the political risk class for several years now, but it has never been the same course twice. The more we’ve taught, the more we’ve refined our thinking. After Edward Snowden’s revelations about National Security Agency surveillance activities, and a series of high-profile cyber attacks on Target, Home Depot, Sony, and other companies, we added a large cyber component to the course. In 2015, just after we finished role-playing a corporate board grilling our student “executives” about how they were going to handle a major cyber breach, Condi turned to Amy and said, “You know, we really ought to turn this course into a book.”

Each year, we navigate the political risk landscape with thirty Stanford MBA students. Our hope is that this book will expand our classroom and help business leaders at all levels, in all industries, from founders and entrepreneurs to large multinational corporation executives and directors, to better manage political risks and opportunities. We share what we have learned from experience in government and the private sector; interviews with leading investors, CEOs, and risk managers on the front lines; academic research in psychology, organization theory, and political science about why people and organizations make the decisions (and mistakes) they do; and case studies and simulations that we have created and conducted in the course. Throughout, we ask you to walk in the shoes of hypothetical executives making hard choices about realistic risk scenarios. Should an American cruise line withdraw from the Mexican market as drug-related violence there rises? How can a fictitious Japanese telecommunications company mitigate the risks of partnering with the Burmese military in a country riven by ethnic conflict and facing a difficult transition to democracy? How should a tech company deal with early reports of a massive cyber breach? These are among the challenges this book considers.

We also share examples of real companies grappling with real political risks in real time across a range of industries. Some, like FedEx, Royal Caribbean International, the Lego Group, and Royal Dutch Shell, highlight best practices that can be borrowed. Others, like SeaWorld, Boeing, Sony Pictures, and United Airlines, offer cautionary tales and lessons to be learned. We also reach outside the business world to some unusual places, drawing insights from risk management successes and failures in nuclear force posture, aircraft carrier operations, the NASA space shuttle program, evidence-based medicine, and winning football coaches.

Our goal is not just to provide some interesting stories. It is to offer a useful framework that can be deployed in any company to improve political risk management. Our bottom line is your bottom line: Companies that best anticipate and manage political risks will have the strongest competitive edge. The four-part framework we provide is simple yet powerful:

Before we take you step-by-step through the framework, we delve more deeply into understanding twenty-first-century political risks—what they are, where they came from, and why they are so challenging to manage. Chapter 2 examines the proliferation of risk generators and offers our list of ten political risks that every company should keep on hand. In chapter 3, we look at how political risk has evolved over time, examining megatrends in business, politics, and technology that have made political risks more diverse, pervasive, and consequential. Chapter 4 tackles a puzzle: Why do studies repeatedly show that most companies see the importance of managing political risk but have such a hard time doing it? We explore the key barriers to effective political risk management—what we call the “Five Hards.”

Chapter 5 then introduces our framework with a closer look at two companies—Royal Caribbean International, which got political risk management right, and SeaWorld, which got it wrong. Chapters 6 through 9 cover each step in the framework, sharing insights from academic research and lessons from interviews with business leaders, class cases, and our personal experiences. Each of these chapters is organized around three guiding questions. The questions can be deployed in your own organization to improve political risk management, whether you are an entry-level employee, a mid-level executive, or a director on the board. We summarize them below.

Guiding Questions for Effective Risk Management

Understand: 1. What is my organization’s political risk appetite?

Analyze: 1. How can we get good information about the political risks we face?

Mitigate: 1. How can we reduce exposure to the risks we have identified?

Respond: 1. Are we capitalizing on near misses?

Understand: 2. Is there a shared understanding of our risk appetite? If not, how can we foster one?

Analyze: 2. How can we ensure rigorous analysis?

Mitigate: 2. Do we have a good system in place for timely warning and action?

Respond: 2. Are we reacting effectively to crises?

Understand: 3. How can we reduce blind spots?

Analyze: 3. How can we integrate political risk analysis into business decisions?

Mitigate: 3. How can we limit the damage when something bad happens?

Respond: 3. Are we developing mechanisms for continuous learning?

In chapter 10, we offer some final thoughts about moving beyond intuition. Politics will always be an uncertain business, but managing political risk does not have to be pure guesswork.

While oriented to international business readers, this book is designed to be a useful primer for anyone wishing to better understand the changing political and business landscape. Topics we address include:

• Understanding and prioritizing political risks

• Taking advantage of global opportunities and efficiencies without unduly increasing vulnerability

• Harnessing tools like red teams and scenario planning to make better decisions

• Developing strategies for mitigating political risks and limiting the damage if something bad happens

• Creating a continuous learning cycle to anticipate, handle, and recover from political risk crises

As FedEx founder, chairman, and CEO Fred Smith told us, “People who don’t pay attention to political risk who have any vulnerability to it ignore it at their peril.”

“People who don’t pay attention to political risk who have any vulnerability to it ignore it at their peril.”

—Fred Smith, founder, chairman, and CEO, FedEx

As we will see, political risk management has been part of FedEx’s DNA since the company delivered its first package in 1973. We hope that this book helps make political risk management part of your organization’s DNA, too.

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The Blackfish Effect: Twenty-First-Century Political Risk

KEY TAKEAWAYS: TWENTY-FIRST-CENTURY POLITICAL RISK