By Steve Culp
I wrote a column nearly nine years ago about managing political risk. In 2012, there were a number of significant developments with geopolitical impact including the opening of Brexit negotiations, debates about the US debt ceiling, and the Arab Spring protests in North Africa and the Middle East. In addition, most countries’ economies were still recovering from the financial crisis of 2008.
A global risk management study Accenture conducted back in 2011 also indicated that despite the above challenges, most companies neither measured nor managed political risk. This has changed over the past decade and companies have made significant progress in identifying, measuring, and managing such risks. As subsequent studies have shown, risk management has evolved as a core corporate function, increasing the levels of connectivity within the business and in many cases the influence of chief risk officers has grown tremendously.
And while progress has been made, political risks, like virtually all risk categories, have evolved and businesses face a different and more fragmented geopolitical environment that they must proactively navigate. Three ways that political risk has evolved since my last post include:
1. New global order. Geopolitical tensions and the impact of Covid-19 have led to more regional or national, and potentially protectionist, economic approaches. This has extended to regulation, trade and investment, resulting in a more fragmented global market. Trade wars are increasingly common as one example of more friction in the “system”, and major multilateral alliances such as NATO and the WTO have been challenged by this new world order.
2. New growth leaders. The pace of growth is shifting, with new regions outpacing traditional players and the pandemic has exacerbated the gap between rich and poor nations. In parallel new currencies are emerging, from the Satoshi of Bitcoin to other cryptocurrencies such as Dogecoin, and new investors are making use of web-based platforms to buy and sell collectively at scale. The risk is that new players and platforms could establish new rules, so organizations will need to update their assumptions and models, much more frequently, to analyze and prepare for potential impacts.
3. Continued disruption from technology. The reach and influence of technology continues to deliver remarkable benefits. In parallel, there are new risks that accompany new technologies, including areas such as cybercrime and data privacy. Cybercriminals pose a threat to free elections, while power grids now rely on networking and other technologies that are vulnerable to cyber incursions. Similarly, the manufacturing of established products such as automobiles now depends on the availability of sophisticated computer chips, adding a new bottleneck in the global supply chain. The impact of technology on the way we live and work has accelerated further in the past year leading to a rise in cyber incidents across business ecosystems. Accenture’s Cyber Investigations and Forensic Response (CIFR) team found a significant increase in incident volume in 2020 on 2019 figures, especially in the second half of the year, with a 160% increase in ransomware events and an almost 200% increase in third party and supply chain intrusions.
Despite all the change of the past decade, the framework we suggested in 2012 – a three-step process that enables companies to identify key political risks, measure their potential impact on performance, and determine the best method to manage such risks – is still relevant today.