Geopolitics – once the domain of policy-makers, diplomats and scholars – has begun to draw substantial corporate attention as it starts to disrupt the business environment and affect the fortunes of companies.
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There is growing anxiety in C-suites and boardrooms these days as companies confront one of the most challenging operating environments in recent memory.
Persistent inflation, climate change, regulatory compliance, competition for talent, digital transformation, generative AI, cyberthreats and supply chain disruptions all fight for time on the corporate agenda.
In the last few years, however, a new, more difficult and more complex issue has risen to the top of the agenda.
Geopolitics – once the domain of policy-makers, diplomats and scholars – has begun to draw substantial corporate attention as it starts to disrupt the business environment and affect the fortunes of companies. Boards and CEOs now need to pay attention to significant new threats that shifts in the geopolitical landscape pose to their businesses.
For most of the last three decades, businesses have been able to take for granted the relatively free flow of goods, services, capital and technology around the world.
This was an era of economic convergence characterized by stability, the diminishing importance of geographic barriers and the globalization of markets. As market barriers disappeared, efficiency became the focus of the day as companies sought competitive advantage by globalizing operations and value chains.
Early fissures in this global business landscape began to appear with the outbreak of U.S.-China trade tensions in 2018. The COVID-19 pandemic accelerated the fragmentation process by demonstrating the vulnerability of companies’ international operations and supply chains.
The pandemic also made countries aware of the inherent risks of high levels of economic interdependence. The corporate response was to reconfigure and, in many cases, reshore or “friendshore” their supply chains and operations.
At the same time, countries began to look at becoming more self-reliant in order to better protect themselves from future shocks. This resulted in a heightened focus on national security and the revival of national industrial policies and increased protectionism.
As the world was emerging from the pandemic, Russia attacked the Ukraine, followed a year later by the outbreak of war in the Middle East. Both events caused major disruptions of shipping routes and supply chains.
Now there are growing concerns about a crisis in the Taiwanese straits and the expansion of the war in the Middle East. Add to this political instability in South America, the resurgence of terrorism, state-backed cyber-aggression, the emergence of populism and nationalism and the diminishing support for international institutions.
A major issue, particularly for Canadian companies, has been growing political instability in the United States.
There are concerns that another Trump administration, with its disdain for multilateral institutions and a rules-based international order, its muscular America-first agenda and its inclination for tariffs and “easy-to-win” trade wars could both have serious implications for access to the U.S. market and further destabilize the international economy.
All of this makes for a dangerous and highly volatile operating environment.
In an accompanying statement to a recent JPMorgan Chase earnings release, CEO Jamie Dimon said that this may be the most dangerous time that the world has seen in decades. Indeed, one business analyst has coined the acronym VUCA (volatility, uncertainty, complexity and ambiguity) to describe the current operating environment.
Companies need to prepare themselves for continuing geopolitical turbulence in the coming years. Until now, most businesses, if they thought about geopolitical issues at all, did so in an ad-hoc manner or as a response to a particular event. This approach is no longer sufficient.
Given the rapidly changing geopolitical landscape, companies need to proactively develop the capacity to anticipate and respond to geopolitical changes in real time. This means understanding where their operations, supply chains and key revenue sources are exposed to geopolitical shifts.
It also means they need to develop a capability to continually monitor changes in the geopolitical landscape in order to foresee potential threats or opportunities and be able to develop strategies to mitigate or capitalize on them.
This involves upgrading their stress-testing and scenario-planning capabilities in order to identify potential risks, build early warning systems and develop mitigation strategies. Geopolitical risk considerations will need to be incorporated into strategic-planning and capital-allocation exercises. Doing this will help ensure that businesses build the resilience needed to adapt and prosper in a VUCA environment.
Boards also have an important role to play in this area. One of their main responsibilities is ensuring that a robust and disciplined geopolitical risk governance structure is in place, including processes to identify specific vulnerabilities, potential risks and mitigation strategies and assign clear accountabilities.
They also need to upgrade their own geopolitical expertise, particularly as it relates to the structural changes taking place in the global landscape. Boards should also be involved in periodic scenario and crisis-simulation exercises to ensure that the company is well prepared to manage these risks. The changing geopolitical landscape should become a regular topic on board agendas.
Few companies will be insulated from the dramatic shifts taking place geopolitically. Having a disciplined process for assessing and managing these risks will become an important source of competitive advantage in the future.
Micheál Kelly is an executive-in-residence at the University of Ottawa’s Telfer School of Management, where he was previously dean from 2000-10. He was dean of the Lazaridis School of Business and Economics at Laurier University from 2012-22.
