Barely a quarter of a century after the fall of the Berlin Wall, the world again faces a major risk of conflict between states. This was the conclusion reached by Margareta Drzeniek-Hanouz last year. In January 2016, the World Economic Forum (WEF) lead economist went on to ponder: ‘A number of seemingly disparate events make us think that a wide range of global risks are looming larger on the radar screen than ever before. Have we reached a new level of risk?’
She cited floods from Northern England to Missouri, Chinese stock market ‘wobbles’, and ‘sabre rattling’ between Saudi Arabia and Iran. Since then, 84 people were killed in the Bastille Day attacks in Nice while the UK has, arguably, caused the economic destabilisation of an entire continent with its vote for Brexit.
Drzeniek-Hanouz was describing a more sophisticated world than the Game Theory-led dilemmas of the Cold War. She cited how the means with which to wage conflict had rapidly and dramatically changed, that cyber attack and ‘competition for resources’ were, respectively, new and growing geopolitical problems.
The WEF’s Global Risks report stated: ‘The global supply chains set up by multinational corporations are more efficient, but the complexity and fragility of their interlinkages make them vulnerable to systemic risks, causing major disruptions.’
The report was accompanied by a global map warning of everything from ‘prolonged neglect of critical infrastructure’ in Paraguay to water crises in Egypt, large–scale terrorist attacks in Burma to liquidity shocks in Portugal and Spain.
This geopolitical risk mapping is an area in which multinationals have invested heavily in recent years.
Globalisation is considered vital for growth among the biggest companies, given many advanced western markets are saturated with mainstream goods and by the biggest brands. With the hunger to expand operations into new markets that have their own customs and legal systems comes an increasing risk of reputational damage in their home territories.
Over the past decade, African countries have experienced consistent economic growth of between four and five per cent per annum, while the International Monetary Fund anticipates a boon for sub-Saharan countries. The continent’s middle class has tripled over the past three decades, but the region is a crucial example of where mapping is important, given its political and regulatory instability.
The maps help companies understand how to mitigate these problems. They draw on political, financial, macroeconomic and industry risk metrics to present scores for countries that indicate how safe it is to do business there and whether or not to invest in those regions.
The map for insurance brokers Marsh, for instance, indicates political risk on a colour code, ranging from light green to indicate a stable country, such as Canada or Sweden, to red for the likes of Afghanistan and Cambodia. But questions remain over how effective these maps are, given they are a relatively new tool, and that colour coding can seem simplistic in an age when so much data is available to analysts. In particular, many of the maps have focused heavily on either or both of security and economic risks, meaning that using them to interpret corporate reputation is at a nascent phase.
Rick Cudworth, Deloitte’s UK resilience and crisis management leader, says: ‘It’s very clear that geopolitical risks have been increasing, over the last two or three years in particular. After the Second World War, geopolitical risks were stable or even declining.’
Cudworth points out that large corporations were comfortable managing risks themselves for decades, but this was because they were dealing with problems largely within their control. If there was an internal fraud, for example, they could alter processes and punish the culprits without a 24-hour news cycle exposing problems that were down to maybe a couple of people in an organisation of thousands.
Now there is increased risk of terrorist attacks or souped-up regulation to tackle tax avoidance, Cudworth says many executives tell him their ‘risk appetite has gone down’, implying they will only remain in markets they consider safe or stable.
Cudworth sighs: ‘But de facto their risk appetites have gone up, unless they want to exit the global world.’ He believes a desire to reduce the number of markets in which a multinational works, or a knee jerk decision to dump a supply chain operating in a difficult region, is unlikely.
His concern, though, is that geopolitical risk mapping is a blunt tool in trying to work out how to manage that risk: ‘It’s used as a term, but it’s not well-defined what risk corporates mean.’
One senior communicator suggests that a major development in mapping has placed an additional emphasis on reputational risk, when previously experts would largely advise multinationals on where it was safe to work. He says: ‘Previously, you would go to a security firm, like a Kroll, and ask Should I invest in this part of the world? Is there going to be a war? when you weren’t investing somewhere you knew, like Europe or the US.’
This was a trend predicted by the Economist Intelligence Unit in 2005. A survey of 269 executives responsible for managing risk found that managing reputational problems was the most difficult of 13 challenges they faced. The reported stated: ‘Reputation is a prized, and highly vulnerable, corporate asset.’
The source adds: ‘Now, because of FTSE-100 rules, if, in particular, you’re a mining extractor or an oil company, people are concerned over whether you have made an agreement with somebody who actually has the right to sign that contract or you find yourself involved with a partner who is convicted of bribery.’
The latter comment refers to the introduction of the Bribery Act in 2010, which has extra-territorial reach for UK companies operating overseas. This forces firms to understand and put in place procedures that can prevent bribery. Transparency International points out that it is a ‘failure by a commercial organisations to prevent a bribe being paid to obtain or retain’ resources’ business.
The lobby group adds: ‘The Bribery Act, unlike previous legislation, places strict liability upon companies for failure to prevent bribes being given (active bribery) and the only defence is that the company had in place adequate procedures designed to prevent persons associated with it from undertaking bribery.’
The extra layer
Most communicators contacted for this article say there can be a simplistic view of what geopolitical risk mapping involves – essentially, it returns to old assessments of where a civil war or terrorist attack might occur. While these problems need to be understood, mapping aims to cover a variety of problems.
Martin Hatfull, international public affairs director at Diageo, and a former diplomat, says: ‘The term ‘geopolitical risk’ covers a wide range of factors. It has become increasingly important for Diageo to understand the impact of the external environment on our business as we generate more of our value in regions that are more volatile and unpredictable than established markets.
‘Risk mapping is one of the tools which help us evaluate where we see the biggest risks – and opportunities. We look at our business ambitions in a market, overlay the external threats, explore possible scenarios and then assessthe potential impact on us. For Diageo, that will often be in terms of regulatory or fiscal policy.’
Another senior communicator agrees: ‘Looking at geopolitical risk as a reputational risk is something new, it’s something
we wouldn’t have thought about a few years ago.’ The source adds that economic, political and security risks have been considered for some time. For example, a clothing company might open a factory in a country that is lightly regulated for tax, thus posing little economic risk; where the political situation suggest nationalisation of foreign businesses is unlikely; and where security risks are minimal because there is little or no chance of a civil coup.
Companies might feel secure working in such a nation, until a not-for-profit organisation concludes it is full of sweatshops, with workers paid an unfair wage, even if that money offers a considerable purchasing power.
Steve Morris, managing partner at Portland Communications and a former head of 10 Downing Street’s strategic communications unit under Tony Blair, argues: ‘Companies have been good at measuring economic risk, political risk and security risk, but reputational risk is another level on top of that. Reputational risk is an intangible: it’s like risk analysis with a tabloid nose.’
Clients like to have metrics with which to measure risk. That’s difficult with reputation, given that intangibility. One source points out that ‘you could write a 25,000-word essay on what is going wrong’ in a developing world country, but few companies would want that level of detail. A risk map explains the situation quickly, but the communicators will have to provide the context on why a country is shaded red to identify it as a place where extra security or internal controls are needed.
Pete Bowyer, managing partner at Maitland Political, advises many companies on the risks of climate change. He says: ‘A number of our clients look at climate policy and how it impacts their reputation. There isn’t a causal relationship [between the map and where multinationals operate], but it can shape operations.’ A climate change risk map, then, could help a company balance its interests between a European Union with heightened environmental regulation against areas where governments have little concern about carbon emissions and are committed to fast economic growth. A firm pressed by shareholders to improve its environmental responsibility would up production in the former, while another with pressures on its balance sheet might focus on the latter.
Given the nature of their businesses, large insurance firms have particularly focused on publishing risk maps. Marsh, for example, produces an annual map in conjunction with BMI Research.
Alistair McVeigh, UK practice leader of political risks and structured credit at Marsh, says mapping has quickly gained sophistication to take account of the myriad risks referred to by the likes of the World Economic Forum.
He adds that a map might be published as ‘annual’, but it is frequently updated to take account of everything from a sudden coup to a reduction in credit rating. McVeigh says: ‘Three or four years ago the annual risk maps were static, and that can soon become redundant. You need underlying data to produce the matrix. There has been evolution in the market, moving to interactive map with real-time data.’
He concedes that many large multinationals have been working on similar data for years, but argues the insurance maps are, at the very least, ‘reaffirmations’ of the internal data and conclusions they make.
To help these firms, mapping now has to be far more sophisticated. This means risk of an armed conflict might be less of a concern than an economic one, depending on the company. McVeigh argues: ‘Mapping has become a lot more sophisticated. Country risk can be very much generic, a country given a rating based on an amalgamation of factors. What you want is to be more granular. You want to show that the economy could be distressed but there is quite benign political risk or vice versa.’
He adds that the maps help executives calm the nerves of investors. Political risk insurance is expensive and not an obligatory purchase, but even just demonstrating that boards have looked and considered the risks on the maps would help protect a firm being sued should a major incident unexpectedly flare up in a new market. ‘Mapping is a major first step and later there is insurance,’ says McVeigh.
The introduction to Marsh’s latest map, published in January, states: ‘In the last decade, multinational organisations have undertaken unprecedented international expansion, leaving them exposed to global credit and political risks like never before.
‘And those risks — including terrorism and political violence, armed conflicts, increasingly powerful anti-establishment political movements, and persistently low commodity prices — continue to grow. Multinational risk professionals must now be prepared for virtually any type of political or economic risk threat in both developed and emerging markets.’
The world has irrevocably changed and with that comes greater risks to communicators who are trying to protect the corporate reputation of their company.