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Strengthening Your Political Risk Muscles
When we started teaching our political risk course several years ago, some future trends seemed clear. North Korea’s Kim Jong-un would pose a growing and grave nuclear danger. China’s rise would probably challenge American influence in the Asia-Pacific. The brittle state system of the Middle East—cobbled together on the back of a napkin as the Ottoman Empire ended—would continue to generate instability and human suffering. Yet many developments were not so evident back then. We might have known that Russia would be a problem, but not that it would annex Crimea. We expected the European Union would face stresses, but we did not expect Brexit. And many events were simply unimaginable. Who would have thought that Donald Trump would be elected president of the United States? Or that France would narrowly escape a National Front victory? Or that a Filipino strongman would come to power, turning his country away from the United States and toward China?
Politics has always been an uncertain business. Technological innovations; government institutions; individual leaders; the ambitions, emotions, and aspirations of peoples—these are large forces. Sometimes they move gradually and incrementally. At other times, they move suddenly and seismically. No one can see precisely how human history will unfold.
Understand: 1. What is my organization’s political risk appetite?
Develop processes (e.g., annual risk setting workshops) to make risk appetite explicit and updated.
Analyze: 1. How can we get good information about the political risks we face?
Collect information that is specific to your needs, includes perception and emotions of key stakeholders, and answers the right questions.
Mitigate: 1. How can we reduce exposure to the risks we have identified?
Identify where asset value and vulnerability converge; build the nuclear triad (disperse critical assets); fly the empty plane (build flexible surge capacity); align with others in the industry.
Respond: 1. Are we capitalizing on near misses?
Plan for failure, not success; look for weak signals; reward courageous acts.
Understand: 2. Is there a shared understanding of our risk appetite? If not, how can we foster one?
Create a common language for discussing risk and a consistent process for identifying, evangelizing, and owning risk.
Analyze: 2. How can we ensure rigorous analysis?
Harness tools like scenario planning, red teams, and thinking backwards. The goal is not to predict the future but to make better decisions by “re-perceiving.”
Mitigate: 2. Do we have a good system in place for timely warning and action?
Develop proactive, timely situational awareness for risks “knocking on the door” and tripwires that trigger protocols and actions.
Respond: 2. Are we reacting effectively to crises?
Follow five key steps: Stop the bleeding, activate the team, communicate what matters to you and why, tell your story, and beware of multiple audiences.
Understand: 3. How can we reduce blind spots?
Develop processes that foster imagination, a better understanding of others’ perspectives, and truth-telling to guard against groupthink.
Analyze: 3. How can we integrate political risk analysis into business decisions?
Bake in political risk thinking instead of bolting it on at the end of a business decision. Political risk analysts need to be close to business units, understand their needs, and deliver useful inputs.
Mitigate: 3. How can we limit the damage when something bad happens?
Drink the cup of coffee: Build relationships with key stakeholders before you need them.
Respond: 3. Are we developing mechanisms for continuous learning?
Use counterfactuals; train, train, train; continuously reinforce company values as a touchstone for action.
But managing political risk does not have to be pure guesswork. You do not have to know exactly where political risk will come from if you are well prepared—if you are looking in all directions, considering political risks at the highest levels, and developing planning and thinking across your organization. Just as world-class athletes enhance their performance through strength and conditioning training, companies can improve their performance by building their all-around political risk muscles. We hope you will think of our framework as a workout plan or training guide to get your organization into better shape. Understanding, analyzing, mitigating, and responding to risks are the key elements. Our guiding questions provide more detailed exercises to hone your political risk capabilities. We pull together the main ones in the table above.
The most effective organizations have three big things in common: They take political risk seriously, they approach it systematically, and they lead from the top.
Some companies have no choice: They are born into industries that are buffeted by political action. Royal Dutch Shell invented modern-day scenario planning in the 1960s because executives knew they faced a volatile Middle East and a rising organization called OPEC, and they needed better tools to anticipate the future price of oil. FedEx has been managing political risk ever since Fred Smith delivered his first package. Any event that could interfere with a customer experience, whether it’s a labor strike in Europe, food riots in Venezuela, or a tornado in Oklahoma, is his business. As Smith likes to say, the most important thing FedEx delivers is trust. He has been setting the company’s culture and approach to risk for nearly half a century.
For other industries like movie studios and toy companies, the imperative to manage political risk is less obvious. Sony Pictures started caring a lot more about political risk after it was forced off the grid by a North Korean cyber attack. The Lego Group embraced political risk management only after a brush with bankruptcy.
Others see the writing on the wall too late. SeaWorld executives knew they were in an industry that carried significant political risks from animal rights groups and shows that put humans in tanks with dangerous killer whales. Yet the company did not take political risk seriously enough, manage it systematically, or drive action from the top. Instead, executives bet that the future would resemble the past—that Shamu would always be the company’s most valuable asset. Risks were not managed so much as they were wished away.
Bad surprises will always happen. But organizations that take a serious, systematic, and senior-driven approach to political risk management are likely to be surprised less often and recover better. Companies that don’t get these basics right are more likely to get blindsided—as were British Petroleum CEO Tony Hayward and United Airlines CEO Oscar Munoz.
As these embattled corporate leaders learned, if something bad happens, it won’t just be “the risk people” who have to answer for it.