How to manage geopolitical risk in the new era of globalization

Geostrategy by Design, a new book from EY-Parthenon, explores five steps to managing geopolitical risk.

In brief

• Global conflicts and industrial policies have elevated the importance of geopolitics in corporate strategies to its highest level in a generation.
• The C‑suite’s ability to implement a geostrategy will determine which executives lead their companies into successful futures — and which get left behind.
• The EY-Parthenon team collaborated with Vice Dean Witold J. Henisz of the University of Pennsylvania to write a book on leading practices in political risk management.

How do executives position a company for growth when the geopolitical future is uncertain? The EY-Parthenon team leveraged joint research by EY teams and the University of Pennsylvania, along with significant experience helping companies to manage geopolitical risk, to explore the answer to this question in a new book, Geostrategy by Design.

At this moment of deep and broad geopolitical transition — when one era of globalization is being replaced by another — executives are being forced to ask themselves that question. That’s where “geostrategy” — the holistic and cross-functional integration of political risk management into broader risk management, strategy and governance — comes into play.

As explored in the book, previous generations of corporate executives have faced similar dilemmas, having to overcome challenges and seize opportunities associated with political risks. For instance, as the Cold War ended, executives were faced with making geostrategic decisions regarding whether and how quickly to globalize their companies.

First, companies should scan, by identifying and dynamically monitoring geopolitical, country, regulatory and societal risks. This requires an investment in improved identification and dynamic monitoring to enhance executives’ understanding of the political risk environment. Political risks should be included as part of a company’s risk identification processes and tracked through both qualitative and quantitative indicators and analysis.

Second, companies should focus that analysis, assessing how the identified political risks could affect the company. This requires impact assessments at the functional and business unit levels and a top-down assessment at the corporate level. Companies can model the impact of potential geopolitical developments and other political risk events across key business functions, such as sales, supply chain, investment and data management.

Third, companies should manage the political risks that are considered material to their business, integrating them into connected-risk approaches. The political risks to actively manage should be determined by the outputs from the scan and focus processes. The risk team should target hedging strategies that help reduce the impact of downside geopolitical developments and other political risk events, while also proactively identifying strategic opportunities the company could pursue related to upside risks.

Fourth, executives should strategize by incorporating geopolitical considerations and other political risk analysis into strategic decisions. Executives should task the geostrategic team with conducting a global footprint assessment for geopolitical risks — and then adjust their footprint strategy accordingly. They should also proactively include political risk analysis in strategic planning processes, especially when pursuing transactions, considering entering or exiting markets, and refreshing or creating a business strategy.

Finally, and perhaps most importantly, companies should govern via a cross-functional geostrategic team. Boards and C-suites need to put in place the proper governance structure so that all of these activities are coordinated across the organization. Only in doing so can executives create the culture shifts necessary for the successful integration of geostrategy into business operations and strategy.

How to build your geostrategic infrastructure

In the new era of globalization, geostrategic imperatives will affect both short-term profits and long-term value creation. The performance of CEOs and other executives will be increasingly measured by their geostrategic performance and acumen. That’s because shifting geopolitical circumstances will have more material impacts on business outcomes.

Research and the significant experience of EY teams in helping companies implement geostrategies suggest that establishing or improving governance structures should be the first priority. There are three steps to ensuring a company’s geostrategy governance is fit for purpose in the new era of globalization:

• Create a dedicated function: Make an individual, committee, or function ultimately responsible for geostrategy — and hold them accountable.
• Assemble the team: Include a diverse set of executives in geostrategy governance, including the key roles of government relations, operations, risk and strategy.
• Break down silos: Establish the geostrategy team as a coordinating hub for political risk assessments to be shared broadly across the organization, including both top-down and bottom-up information sharing.