Topics:   Corporate Governance,Cybersecurity,Leadership,Risk Management,Strategy

Topics:   Corporate Governance,Cybersecurity,Leadership,Risk Management,Strategy

June 19, 2019

Stavridis Sees Hope Despite Geopolitical Tensions

June 19, 2019

“May you live in interesting times.” Given the current period of profound geopolitical change and turmoil—the US-China trade war, tensions with Iran, populist nationalism in Europe, and Venezuela’s economic collapse—corporate leaders today are certainly living in interesting times. Characterized by ambiguity, these events pose real threats to supply chains, business models, revenues, and profits, making geopolitical risk a critical board imperative.

While business leaders develop strategies to mitigate these risks, the NACD Blue Ribbon Commission on Adaptive Governance recommends leveraging adaptive governance. As the report warns, organizations can have “a pattern of blind spots, where senior leaders [report] high levels of confidence in their ability to transform in response to a fast-changing business environment, but significantly [underestimate] the importance of specific threats.”

NACD recently spoke with former Allied Commander of NATO Admiral James Stavridis about how companies and their boards can best adapt to changing international conditions. Stavridis currently is operating executive of The Carlyle Group, chair of the board of counselors of McLarty Global Associates, and chair of the board of the US Naval Institute. He is a monthly columnist for TIME magazine and chief international security analyst for NBC News. 

The wide-ranging interview covered the key developments shaping uncertainty, volatility, and disruption in the world of geopolitics, as well as the future of board leadership. NACD will publish a second blog based on our conversation with Stavridis, who will be a featured speaker at the NACD 2019 Global Board Leaders Summit.

Friso Van der Oord: The world’s changing rapidly. What do you see as the critical geopolitical trends that will impact American companies in the short- and long-term?

Admiral Stavridis: At the top of the list is cybersecurity—we’re so utterly dependent on operating in the digital world, and yet we’re still grossly unprepared for malevolent activities. Second is the rise of authoritarian regimes globally, and their accompanying populist tendencies. On this issue, I’m cautiously optimistic that we’ll work our way through the challenges. (See why in a piece I wrote called “Democracy isn’t Perfect, but It Will Still Prevail” in Time Magazine.) Third, the rise of technology, as seen through the rivalry between the US and China, especially around artificial intelligence (AI). Fourth, the population explosion in sub-Saharan Africa will have significant economic and geopolitical impact on the world. And finally, the rise of India both as a key market and geopolitical actor. I would argue that over 300 years from today, the history of this century will say more about the rise of India than that of China, principally because of demographics and democracy.

Van der Oord: As you work with clients and meet with executive teams, what are the biggest blind spots you observe during these engagements?

Admiral Stavridis: Let’s start with the rise of great power competition. Here it reminds me of the pre-World War One world, when there was an assumption that there may be small skirmishes, but that we’ll never have great powers come into conflict with one another. I’m not so sure about that. It’s unlikely that we’ll end up in a nuclear exchange, but the possibility of kinetic military activity in the South China Sea, the Arabian Gulf, or the Eastern Mediterranean is not impossible.

Additionally, there’s an increasing assumption that, despite minor or occasional outages, the Internet will remain open and accessible to all. So many companies have not taken any precautions to guard themselves against a prolonged shutdown. However, there are significant structural challenges today in terms of small and large nations being able to block access to electric grids, or control networks in ways that corporate executives haven’t fully considered.

Lastly, India, which is almost invisible in our current dialogue, and then Africa, will experience an enormous population boom mid-century that will really distend geopolitics and demographics.

Van der Oord: Can you talk more about Africa and the continent’s predicted demographic boom? How might that manifest itself?

Admiral Stavridis: People in more desperate regions of the continent will increasingly migrate north. This may have destabilizing effects, and cause humanitarian crises. A big boom in human capital is also expected, which in some parts of the continent will be relatively well managed over time, resulting in major productivity centers. Of note, Africa is a market of increasing importance, but a difficult one to tap into because it’s so differentiated. Strictly because of its size, the continent will have an increasing impact on global culture in ways that may be hard to foresee and predict today. I believe there will be a cultural explosion that will bring new thinking from that domain into the global zeitgeist, in the mid- to late-century timeframe.

Van der Oord: Many boards don’t spend much time in dialogue with management on the topic of geopolitics. But a growing number are considering formalizing oversight of this issue. In your view, what’s the right approach to engaging management teams on these complex issues?

Admiral Stavridis: It really does depend on the board; though I do generally believe that all boards need to spend more time on this. I’m on the board of a Greek shipping company with vessels operating worldwide. Its international trade is the absolute métier of the corporation, so it’s extremely sensitive to geopolitical risk, both tactically (in terms of where our ships go) and strategically (as global trade becomes less stable). That board is extremely focused on geopolitical risk. In the middle of the spectrum, I sit on the board of an international financial advisory mutual fund. The company is fairly aware of geopolitics because of international funds and the general importance of that.

My main point is that it varies, and that’s okay. Boards should assess and have a clear-eyed view of their specific needs. This should all be driven into the strategic planning process of the business. It’s necessary but insufficient for directors to have a conversation about what’s going on in the world and how that might impact their companies. Instead, as corporate leaders lay out five, 10, or 50-year plans, they ought to be thinking about geopolitics, and that should be included in the strategic planning process at the front end.

Van der Oord: How are you making sense of what’s happening now at the nexus of cyberinstability and geopolitics, particularly with China, and how do you place that in a long term context?

Admiral Stavridis: In my view, there are four big irritants in the US-China relationship—cyberwarfare, intellectual property [IP] theft, imbalances or “unfair” practices in trade, and territorial disputes over the South China Sea. In the end, the easiest to address will be trade. IP over time will likely also resolve itself, given that China is developing its own intellectual capital with extreme rapidity. I also believe cybersecurity issues will likely be resolved through a rough, nuclear-like deterrence regime that emerges over time.

The hardest one will be the South China Sea. China is adamant that they own it. The US is adamant that they do not. That said, China has the advantage of geography and determination—because it’s critical to its Belt and Road Initiative. But I am cautiously optimistic that over time, Washington and Beijing will avoid an open conflict with one another. Ultimately, it’s in neither side’s interest to get into a war; and neither side is trying to fundamentally change the other. So I would categorize outright conflict as a low, but not impossible, probability. It’s certainly worth watching; and for those who want a deeper dive, I would recommend Graham Allison’s book Destined for War: Can America and China Escape Thucydides’s Trap?

Van der Oord: NACD staff are working on a major study right now on the future of board leadership in the United States. What are critical skills and abilities that boards or directors should adopt in next five to 10 years?

Admiral Stavridis: First in my mind is proficiency in cybersecurity. Board members themselves have to be a hard target, because they represent their corporations. Each board member should undergo a checklist from the company’s chief information risk officer, ensuring that they’re effectively protecting themselves against potential attacks.

Directors also need dedication to the task of being a board member. I’ve been passing out copies of the book Bad Blood: Secrets and Lies in a Silicon Valley Startup to my fellow board members. It’s a great cautionary tale about the abject failure of arguably the most prestigious board assembled in American history. These are preeminent folks who just didn’t pay attention, and didn’t have the hard core skills needed. Directors should have respect for the craft of being a board member—if you sit on the board of a biotechnology company, consider who in the boardroom possesses the requisite expertise. This doesn’t mean every board member has to have every skill, but directors individually and boards collectively should be thoughtful about composition.