Are you making political risk a strategic priority?

1. Identify and collect quantitative political risk indicators

Only a third of companies regularly collect quantitative political risk data. Among executives that prioritize improving political risk identification, almost half point to quantitative data as key. While political risk will always involve qualitative analysis, companies should do more to collect and integrate quantitative indicators into their political risk identification and monitoring systems. Quantitative indicators such as corruption indices and broader country risk ratings will expand companies’ efforts to identify new and emerging risks and monitor the political risk levels in key markets. And such indicators will also be useful in modeling the potential impacts of political risk on the company, incorporating political risk into enterprise risk management (ERM), and assessing the political risks associated with strategic decisions such as market entry and exit.

2. Develop or acquire the ability to assess the business impact of political risk

More than 90% of global executives expect political risk to hit their company’s growth and investment and operations and supply chain, and about three-quarters expect revenue impact (see figure 5). Executives also point to assessing the impact of political risks as the most important area of improvement needed to overcome challenges and seize opportunities associated with political risks. Companies should invest in political risk impact assessment at the functional or business unit level and ensure that these assessments are shared in aggregate with the C-suite on a regular basis. These functional or business unit impact assessments should also inform an enterprise-wide assessment of the potential political risk impacts on a regular basis. Both levels of assessment should incorporate the quantitative political risk indicators that the company monitors into their models and to report impact assessments in a tangible way (e.g., financial impact on revenue) to the C-suite and the board.

3. Integrate political risk into ERM

Strikingly, only 23% of global executives say their company integrates political risk management into broader risk management on a regular or proactive basis. Companies should integrate political risk into their ERM process to gain a full view of the outside risks they face. Such integration can be particularly impactful if it leverages quantitative political risk identification outputs and tangible estimations of political risk impact. The ERM team responsible for political risk should seek to target financial and operational hedging and other risk strategies that foster resilience, minimizing the impact of downside political risk events while also proactively identifying strategic opportunities the company could pursue related to upside political risk events.c

4. Engage your board and C-suite to incorporate political risk into strategic planning

As revealed in the 2021 EY Capital Confidence Barometer, geopolitical challenges are forcing about 80% of companies to alter their strategic investments. Companies should ensure all of the insights and risk management activities in the steps above are translated into business strategy. This should include not only a regular assessment of how political risk developments affect current strategy, but also the proactive inclusion of political risk analysis in M&A, market entry and exit, and international footprint decisions – as well as in forward-looking strategic planning.

The C-suite and the board should receive political risk training and engage with external subject matter professionals on a regular basis. They should then be actively involved in assessing political risk in strategic decisions to demonstrate there is buy-in from the top on the strategic importance of incorporating political risk into company culture.

5. Set up a cross-functional geostrategic committee

Political risk governance appears to be siloed in many companies. Only about 40% of companies use a committee to govern political risk management, indicating that responsibility in most companies resides within a single function or individual. Companies should establish a cross-functional geostrategic committee including representatives from across the political, operational and financial aspects of political risk management. Country and functional teams are more aware of local political risks but there often isn’t an effective aggregation of such risks at the global level. So committee members should come from both the C-suite and relevant functions or business units. The committee should meet regularly to discuss the political risks the company faces, how and where those risks are likely to impact the business, and what is and should be done to manage them. This committee should also frequently report to the board of directors.

Companies taking these steps will develop a more proactive, comprehensive and balanced approach to political risk management. And taking more proactive actions to identify, assess and manage political risk will improve executives’ confidence in their ability to manage it, providing the confidence to pursue bolder, political risk-informed, growth-oriented strategies.