How to thrive when uncertainty becomes the new norm for governance: #2 Navigating the geopolitical landscape

This blog, second in a series of insight pieces for?chairs and boards, provides perspectives on how to enable organisations to thrive when uncertainty becomes the new norm. The first edition - 'How governance can thrive amidst continuing uncertainty' - set the scene. This edition focuses on navigating the increasingly complex and interconnected geopolitical landscape and the vital role chairs and boards play in protecting organisational resilience and seizing opportunities amidst geopolitical shocks and shifts.

The world is more connected now than ever before but the geopolitical landscape has become more fragmented, influenced by trade wars, regional conflicts and territorial disputes. Geopolitical status quos are confronted by the growing influence of ‘global swing states’ [1] and the transition from open and free markets to more protectionist agendas. More than 60 countries, home to nearly half of the world’s population, head to the polls this year, stoking the risk of further possible shifts. Over a third of these countries have cast their ballot so far, with changes in governments seen in Finland, Indonesia, Portugal and Senegal, to name a few, and with some influential economies including the US and India still to come.

The political and economic consequences of these seismic activities are non-homogenous and far reaching. This is being recognised by businesses, with CFOs predicting geopolitics as posing the greatest risk to their organisations over the next 12 months, without expectations of its diminution [2]. Resulting impacts to organisations’ business models, strategies and operations (including finance, supply chain, people, data security, risk and compliance) may be transient or lasting.

Navigating geopolitics, whether in the form of shocks or more gradual shifts, is a complex matter for leadership teams, who should establish their capabilities (whether internal or externally sourced) in this area and be deliberate in their analysis, to include monitoring the environment and understanding the impact to the business. Alongside this, boards should consider their own capabilities and spend an appropriate amount of time considering this topic, supporting and challenging management.

“The role of the board in this area is to open up the executives’ eyes as to what is going on in the world. An effective board should widen horizons and give perspectives that can be brought into the running of the business. ?The key is to turn the generality of geopolitics into something that is specific to the business. Boards and their executives need to consider the practical consequences of geopolitics on the business.” - Lord Grimstone of Boscobel Kt, Former Minister for Investment at Department for International Trade and Department for Business, Energy and Industrial Strategy

Chairs play a key role and can increase the impact of their boards, enabling them to be prepared to effectively discharge their responsibilities, by focusing on the following areas:

Board capability

Board capability is critical when it comes to the geopolitical challenges organisations are facing. Many board members may not have experienced this before. Even in stable environments, effective boards should be aware of their strengths and weaknesses and seek opportunities to expand their knowledge, evolving in response to the environment in which their organisations operate. Undertaking a comprehensive and honest assessment of the board’s collective skills, expertise and independence is crucial in this dynamic environment. Its wider diversity, to include age, gender, geography, culture, life experience, disability and neurodiversity, also aides the quality of debates.

Boards should be equipped with ‘contextual understanding’, which includes investing time to get to know the organisation, the people in it, the sector(s) it operates in, and?the regulatory and legislative environment within which it operates. This, coupled with a baseline knowledge and understanding of geopolitics, feeds into an important capability of the board which is understanding how these matters might impact the organisation.

The level of geopolitical understanding and expertise required in the boardroom will undoubtedly differ for each organisation, based on its industry and its level of exposure to geopolitical fluctuations and risks. ?Chairs should determine the level of skills appropriate for their boards, balancing this with the competing requirements for other skills in the boardroom, and how best to enhance the board’s geopolitical knowledge. This may be fulfilled by the board having certain capabilities that are relevant to the organisation’s industry or operations or gaining access to geopolitical intelligence from other sources such as management, external advisors, or a specialist committee with geopolitical expertise. ?

Risk management

Geopolitical risk is not a standalone risk; it can permeate throughout the organisation impacting strategy, operations and finance. To understand the geopolitical risk exposure, boards should revisit the organisation’s approach to risk management and ensure that the topic is given sufficient consideration. In particular, some areas of focus should include:

• Challenging management’s process for identifying geopolitical threats and opportunities and their specificity to the organisation.
• Establishing the organisation’s geopolitical risk appetite and tolerance, working with management to define acceptable levels of exposure aligned to the organisation’s overall risk appetite and strategic priorities.
• Evaluating management’s assessment of risk likelihood and impact and whether this appropriately reflects the organisation’s risk exposure.
• Scrutinising actions proposed by management to manage or mitigate the threats, and eliminating uncertainty around exploiting identified opportunities.
• Enabling robust and periodic reporting from management, combined with secondary, and/or external sources of assurance, where appropriate.
• Monitoring the evolution of geopolitical risk over time, and regularly assessing the organisation’s emerging geopolitical risks.

“It is critical that boards, together with management, dedicate meaningful time once or twice a year to have an in-depth discussion on the key risks that are impacting their companies, including geopolitical risks”?- Deanna Oppenheimer, Chair, IHG Hotels and Resorts

During times of geopolitical uncertainty, the board may have to ‘lean in’ more than usual to gain confidence in the organisation’s capacity to understand, identify, assess and tolerate these associated risks. In doing so, boards must be cognizant of the demands on management and determine how to balance its levels of challenge and support, whilst maintaining positive working relationships. Chairs should also consider the most relevant forum for providing such oversight of risk; either at a relevant committee or at the board.

Horizon scanning and scenario planning

Whilst acknowledging that geopolitical events are often unpredictable, a well-informed horizon scanning process is vital to ensure that organisations stay ahead. Boards should determine the frequency for horizon scanning based on the geopolitical risk environment. Complementing horizon scanning with detailed scenario planning also helps organisations to understand the likelihood of occurrence, the range of plausible outcomes, the implications, and prepare for these by developing strategies to build organisational resilience.

The board’s role is to challenge management’s assumptions, inputs, and underlying processes. Boards should consider how organisations will respond to potential geopolitical disruptions and crises, considering that geopolitical risks are not homogenous. There should be distinction between the social and political consequences and the wider economic effects. Boards should also review management’s contingency plans, questioning management on whether it has the capabilities and resources to execute proposed actions in mitigating geopolitical threats. Chairs should consider whether the whole board or a relevant committee or group should work alongside management in the process.

Independent members offer important external perspectives and insights ?which can help boards uncover the “unknown, unknowns” that management can’t see and understand the potential outcomes.

Stakeholder engagement

Understanding stakeholder viewpoints arguably becomes more important for boards when it comes to sensitive geopolitical topics. Boards should not only understand the perspectives, concerns and priorities of key stakeholders and consider these in decision making, but should also consider developing a communication strategy to keep key stakeholders informed about the organisation’s response when such events occur. Chairs, in engaging with the relevant stakeholders, should advocate for policies and regulations that promote positive global interaction and greater collaboration.

"Companies today are operating in one of the most complex and uncertain geopolitical climates in decades—one that is increasingly being defined by shocks rather than stability. No major business is immune to the fraught security developments, simmering economic tensions and intensifying technology competition taking place around the world. In the face of these challenges, executives need to build resiliency by strengthening information-sharing networks and deepening engagement with external stakeholders so that they have the insights and information needed to prepare for potential disruptions." - B?rge Brende, President of the World Economic Forum

The organisation should have a documented stakeholder engagement map that sets out key stakeholders, management individuals responsible for direct engagement, reporting mechanism to the board and, where applicable, the frequency and mode of direct board engagement.

Incorporating geopolitics into boardroom discussions

Balancing the board’s time on geopolitics requires careful planning and prioritisation, ensuring it receives adequate attention without overshadowing other important agenda items. Chairs have the responsibility to guide that balance, based on the importance of the topic, whilst allocating a proportionate amount of time for discussion on geopolitical-related matters. Boards should work towards integrating geopolitical considerations into broader strategic discussions and decision-making processes, allowing it to address geopolitical risks and opportunities within the context of organisational priorities.

Board culture and leadership

In times of geopolitical uncertainty, boards have an increased responsibility for fostering the culture within the organisation and for safeguarding the organisation’s reputation. Geopolitical considerations may raise both compliance and ethical dilemmas for organisations, such as navigating sanctions, managing supply chains or handling relationships with various types of governmental systems. Chairs must set the tone by demonstrating ethical leadership, and boards must uphold the organisation’s values, integrity, and commitment to responsible business practices in how it responds to and navigates geopolitical events.

When geopolitical events happen, organisations are expected to react quickly. As such, leadership in the boardroom should be dynamic. This requires boards to be open-minded in how they view the information provided to them, recognising that this may sometimes mean working with imperfect, incomplete or rapidly evolving information. Boards need to know how to digest the information they receive, understanding the range of possible outcomes, and knowing the appropriate time to act. Boards should leverage the learnings drawn from the COVID-19 pandemic. Crucially, they should be open and honest in their discussions and tackle concerns head on. To support this, it is vital to establish psychological safety in the boardroom, where board members and management feel comfortable in sharing their views.

Conclusion

Geopolitical risks are becoming more complex and increasingly interconnected. Organisations of varying scales and complexities are likely to be impacted by geopolitics to some extent. In light of the above, it is clear that chairs and boards should act in a deliberate manner, ensuring they have the suitable capabilities and that they implement the appropriate tools to build a good understanding of the risks that the organisation faces, all whilst demonstrating ethical leadership. This will empower boards in discharging their supervisory and stewardship roles and, importantly, help to build organisational agility and resilience which is so fundamental to the organisation and its stakeholders. ?

[1] States with significant leverage in international politics but varying preferences for international cooperation, as defined in the GMF publication, Alliances in a Shifting Global Order: Rethinking Transatlantic Engagement with Global Swing States (2023).

[2] Deloitte CFO Survey: 2024 Q1.