Corporate Governance,Leadership,Risk Management,Strategy
March 17, 2015
Economic and Geopolitical Disruptive Forces: History Favors the Best Prepared
March 17, 2015
Now in its third year, NACD’s Directorship 2020® takes an investigative look at the trends and disruptors that will shape boardrooms agendas of the future. This initiative is designed to raise directors’ awareness of these complex emerging issues and enable them to provide effective guidance to management teams as they navigate the associated risks and opportunities. The inaugural 2015 session was held on March 3 at the Grand Hyatt Hotel in New York City, where subject-matter experts from Broadridge, KPMG, Marsh & McLennan Cos., and PwC and corporate leaders explored the boardroom implications of geopolitical and economic disruption.
Illustrating the boardroom perspective on the impacts of economic and geopolitical disruption on corporate strategy.
In his remarks on economic disruption, Peterson Institute for International Economics Visiting Fellow and International Capital Strategies Executive Chair Douglas Rediker examined the changing face of global competitive markets. Governments around the world are increasingly involved in market activities and are more likely to champion domestic businesses or businesses based in countries with which they have trade agreements. This situation creates a business environment in which companies seeking to expand must assess a foreign country’s protected business sectors in order to fully evaluate the endemic risks and opportunities.
Taking a geopolitical perspective, UBS Executive Director and Head of U.S. Country Risk Dan A. Alamariu considered the ripple effects of government regulation, using a case example of the sanctions recently imposed by the US and EU on Russia. Though these measures did diminish the buying power of the ruble, the sanctions also hurt Western companies operating in Russia because consumers could no longer afford to purchase foreign goods. He cited other examples as well. In its efforts to recover from the financial crisis, the Chinese government has recently implemented a number of economic reforms. While these reforms may succeed in re-establishing China as an “engine of growth,” the infighting that they have triggered among political elites could ultimately dampen growth and set the country on an uncertain course. Closer to home, persistent gridlock in the US government is preventing needed progress on issues critical to the business community, such as tax policy and infrastructure.
Both speakers alluded to the fact that as countries become more divided and inwardly focused—both internally and with respect to international relations—developing collective approaches to major transnational issues such as climate change and cyberattacks will become more challenging. Companies will therefore need to devise their own strategies for addressing these challenges.
Economic and geopolitical disruptors are inextricably linked, and the three main takeaways from both sessions are as follows:
- Embrace risk—you may discover opportunities. Directors need to start thinking like emerging markets investors. In other words, they should get comfortable working in a business environment that is volatile and unpredictable. This breed of investor has historically been focused on domestic, regional, and international political and economic risks. Because technology has created a world that is deeply interconnected, investors must proactively cultivate an understanding of geo-economic risks. By extension, it is also important to recognize technology as a major disruptive force that will continue to impact companies across all sectors. For example, tablet devices have completely changed not only how people communicate and access multimedia content but also how companies conduct business. By embracing disruptive technology, companies can in turn create the caliber of differentiated products that will transform the marketplace.
- Be prepared. This ageless scouting motto is especially relevant to anyone managing or overseeing a company. Businesses the world over are more interconnected than ever before, which forces companies to compete across national borders and exposes them to international political and economic risks. Boards need to consider the ultimate “black swan” events that could affect their companies. By extension, directors need to be mathematically literate—if they are not already. Black-swan events include natural disasters, such as Hurricane Sandy, which incapacitated businesses in our nation’s financial epicenter; political events, such as the outbreak of war; economic unpredictability; and technological innovation, which we have seen from the automobile to the iPad. Having a by-the-numbers plan for how the company could behave in specific scenarios will create a comprehensive understanding of the risks the business faces. Because it’s impossible to completely protect a company, it is essential to create resiliency. The board must therefore ensure that incident response plans are in place and must routinely test those response plans to confirm that they meet the company’s evolving needs.
- Beware of “herd mentality.” Directors need to periodically review the current board composition; and if there are gaps in the board’s collective knowledge that may prevent it from assessing areas of risk, it may be in the board’s best interests to bring in a third-party expert to help inform boardroom discussions. This is especially true of cyber risk. Many boards are still struggling to comprehend the depth and breadth of these threats, and because it’s neither possible nor desirable for every board to have a cyber expert in their ranks, it is imperative to bring in outside sources to inform and educate directors and management.
Look for full coverage of this NACD Directorship 2020 session in the May/June 2015 issue of NACD Directorship magazine.