Political risk and related concepts - what are we talking about?

Political risk continues to ride a wave of renewed interest among business planners and managers, mainly because the world seems to be quite complex these days and more volatile and intrusive politics seems to be one reason for that. As a result, international managers are more frequently encountering political risk-related terms and concepts, often in mainstream, online literature where they remain rather unshaped and not very clear.? We will not get bogged down in how, if or why more pervasive political risk is the case. Instead, the modest aim here is to help clarify some of the terms floating around, terms that are useful but only if we have a reasonable sense of their meaning. Common definitions are a long way off and might actually be too reductive anyway, but some notion of the meaning of what follows will at least help with interpersonal and organisational communication.

For parsimony, this will focus on only six terms or concepts that we see a lot of lately: complexity, political risk, socio-political risk, geopolitical risk, stakeholder (in a political risk context) and social licence to operate. This is a somewhat random selection, but each shines a beam on a wider tableau and together they contribute to a broader perspective on political risk.

Complexity

The world is complex, this country is complex, we are facing complex times... Complexity comes up quite a lot, and while the word is usually used casually it still aptly applies to the emerging character of the wider political environment. Complexity means that there are a number of variables affecting a place or situation, the variables themselves are prone to eccentric behaviour, and they are causally linked. If we apply this to the political realm, it means that leaders are less constrained by rules, individual polities are increasingly polarised, the lines between government and other domains of life are more blurry, political relations are increasingly transactional and thus without clearcut sides or norms, there are more major players on the international stage, and politics as a domain is itself under increasing pressure from forces beyond political control, such as climate change and uncertain technological evolution. It is beyond the scope to explain why things are more complex than in recent past eras, but the increasing ubiquity of the Internet and the rise of a multipolar global system, both kicking off in earnest at about the same time, would be elements of an explanation.

As a characteristic of current political risk, complexity is relevant because it makes it harder to see which changes are coming and therefore organisations cannot plan well for them, it yields red herrings and misdirected hype which distract from tangible issues, and it makes it harder to trace the origins of actual problems and therefore makes it harder to fix them.

Political risk

“Political risk” has been subjected to intensive academic examination and definition, but that has not really helped very much since conceptualisations still vary, perhaps naturally enough given the scope of the term. In its more essential sense, political risk means the uncertainty and potential harm for an organisation, arising from the behaviour of explicitly political actors, which tend to be governments but one can expand around the edges a little to include political parties and political movements seeking to influence or replace governments. Less pointedly but more realistically, political risk indicates potential challenges from the interaction of an organisation and the political domain, at whatever geographic level. Within the political domain, the grease between the cogs (actors) includes social and political values and ideologies, power, authority, justice, legitimacy, national identity, and subnational identity. These can create imperatives and rationalities very different from those of a legitimate private organisation, and hence when politics intrudes on the private realm beyond just routine law enforcement and taxation, it can be disruptive and confusing, and even dangerous.

Socio-political risk

Socio-political risk recognises that the boundaries between society and politics, or government, are porous. In most places, there are channels and means by which society communicates with and goads or pressures governments, and governments in turn seek to maintain their legitimacy within society and also apply carrots and sticks to fulfil their official responsibilities, and in some cases also to bolster their position if their legitimacy seems to be slipping. In more institutionalised environments, the society-politics boundary is demarcated by well known roles and rules, but even so, interaction between the realms is often diverse and fluid. In states with less formal institutionalisation, society and politics can be so tightly interwoven, for example through traditional, subnational, and patron-client ties, that they are in effect one set of dynamics. Thus, while in some contexts it might be feasible to talk about political risk and really just mean political, in others when we say political risk, we really mean socio-political risk. It might seem fussy to bother saying socio-political for the hazier contexts, but it can help to impress on the listener that we are not just talking about government behaviour and decisions, but about a domain in which the official - non-official distinction is not especially relevant in power relations and the pursuit of ideals. ?

With respect to the risk in socio-political risk, again for a business, imperatives and rationalities can be very different and might not respect a business’ roles and legal protections. More importantly, though, where socio-political risk is more accurate than just political risk, it means that potential challenges can start on the social or political side but then bleed into the other, potentially multiplying the number of actors involved with a given issue and thereby making it harder to foresee and to untangle (and that reflects the first term we looked at, complexity).

Geopolitical risk

The concept of geopolitical risk has been around for a long time and has generally meant the effects of international rivalries and transnational movements and issues on multinational companies. More recently, the term is becoming quite fashionable and is now often used when political risk would be more apt. For clarity, we need to rein geopolitical risk back into its more specific meaning. Geo refers to geography and the earth, or world. Geopolitical is about politics at the global or international level. States and blocs thereof are the main actors at that level, but transnational movements and groups are also relevant. The currency, or grease, at the geopolitical level is state power and status, and concepts of universal values or social truths.

It is not realistic to fully separate the global and national levels, since much foreign policy is designed with an eye to domestic audiences. Even so, geopolitics does mainly involve national governments interacting with each other. Thus, especially compared to socio-political risk, geopolitical risk plays out on a much broader, more abstract tableau. We talk about China, the US, Russia, or Iran instead of the Popular Front, the General Workers’ Union or this or that clan or business-political family. If we forget that states have important internal dynamics, our understanding of geopolitics can be superficial, but a bird’s eye view still has utility.

Geopolitical dynamics have become more volatile since the end of the Cold War, and the interest in the phenomenon is well justified given the array of global and regional rivalries and alliances that are impinging on trade relations, and cross-border value and supply chains. Geopolitical risk always mattered, but by comparison to the socio-political level it was somewhat staid, with big chess pieces slowly circling and now and then trying an incursion on another’s sphere of influence (often in a third country). Today it is a slam dance by comparison, and some power plays that we have seen in recent years would have been inconceivable in earlier eras. Not much of the geopolitical game at any one time matters to a specific company, and a lot of what is in the news is simply interesting as opposed to relevant. At least for now – given the volatility at this level, it pays to keep a wary eye on it to see just how close the dance might come to the company’s assets and interests.

Stakeholder

This is hardly new, but in the age of sustainability concerns, the concept has gained considerable traction. A stakeholder is an actor, but then too is anyone else involved in political dynamics. What makes a stakeholder different is that it perceives a stake in a company’s presence, activities or fortunes, and might act on this perception, for better or worse. In mainstream conceptualisations stakeholders are usually characterised as potentially friendly or at least neutral unless a company causes them to be otherwise, but in a political risk context stakeholders can be predatory or very much dislike a company just because of what it symbolises. A stakeholder is not just the townspeople with legitimate concerns about a factory being built nearby. It can also be a mafia group, an extremist group, a regime crony worried about legitimate and professional competition, or even a foreign government that would prefer to see its state company win a contract instead of the independent international firm.

Stakeholders are part of the political environment, and might well be actors in wider dynamics that themselves present challenges to a company. But what makes them distinct from just stuff going on is that their actions towards a company are formed after thinking about the company, and aimed specifically at it. Thus, they can have much more direct and tangible effects than environmental dynamics. Even if an environment seems relatively calm, unwittingly treading on the wrong interests could make life very difficult for a foreign company. And the reverse is also true. Not many international companies in politically risky places get very far without supportive stakeholders. Stakeholders can harm and hinder but they also can help, and indeed they can help to counter the ones who would rather see a company fail or get hurt.

Social licence to operate

The SLO is much talked about and highly relevant in political risk, particularly its socio-political side, but in the mainstream casual literature it has not been fleshed out very clearly, and its link to sustainability imperatives has cast it in a somewhat euphemistic light which can obscure some fundamentals. In general, a company gains an SLO when it consults with communities and civil society interests which could be affected by its activities, and adjusts its plans and behaviour to minimise problems, and indeed to create new socio-economic opportunities for ordinary people. If there is conflict in an area of operations, a company can also contribute to peace-building by giving rival groups a common shared interest in the success of mutual endeavours, thereby gaining even more trust and social merit. The social licence manifests as smooth civil society relationships and a minimum of friction.

It is easy to see how this links to sustainability, corporate citizenship, ESG and other notions about being a good company. But we need to aware of a couple of hard realities. One is that companies are profit machines. That is capitalism, like it or not, and companies are capitalism in action. People in companies usually like to think they are doing something good, but they also really like to hit quarterly targets. It is highly doubtful that a company would bother seeking an SLO in any given context unless it had to. “Had to” can partly come from regulations, but then it blurs with the official licence to operate. More directly, it comes from an awareness of the problems that a company could face if it ran roughshod over social interests and values. These could be local and reputational problems, but ultimately they could end up as a blow to investor confidence and therefore company value. Thus, the SLO is not just about companies being nice. It is about self-preservation. That was not always the case. In past decades companies could get away with a lot in the pursuit of profit. Expectations of companies have changed, though, and so too have the means to take them to task. It might sound cynical to posit the SLO as the pursuit of self interest, but seeing it as just an effort to be nice is specious, and makes the SLO sound optional when in many contexts it is not.

We come to the other hard reality, which ties in with the last line above. It might be the author’s imagination, but most talk around SLOs seems to be in the context of foreign operations in particularly politically risky places, where governments are weak or corrupt, and if the state has much presence in people’s lives it is usually not a good one. Indeed, in many developing counties, if one were to ask in a given area (away from the capital) who ran the show, people would not point to the government. They would point to a local insurgent group, traditional elders, a “mafia” group, and / or a couple of particular clans, probably with ties across all of them sustained by bargaining and mutual understandings. These entities and their leaders represent local society, and they tax, arbitrate and provide justice within it. They punish transgressions, including tax dodging, and keep the peace partly to keep themselves safe from upstarts and rivals.

Some companies try to directly engage with local powers, but it looks bad and can backfire. It is safer to provide social goods, such as jobs, educational opportunities, and social investment. Done with and through local elites, this helps them to retain and build social legitimacy, and hence they see the company as valuable to them. Then they do not create problems for the company, and they dissuade others from doing so too. In this context, the SLO is at least as critical ?as an official business permit, and beats an army of bodyguards in terms of security. There are a range of caveats, subtleties and moral considerations in building a local SLO, particularly in terms of who benefits from a company’s efforts, but this is the basic idea in weakly (officially) governed contexts.

A hardheaded view of the SLO might be disheartening to those who like to think that companies can indeed simply be good. But it is a far more robust conceptual starting point than an emotive one, and carries with it a much stronger rationale for sustaining alignment with social interests and values. The SLO is not a simple challenge. For example, what happens if society becomes nasty? Do companies then become nasty to align with social values or try to stick with what the UN says is good, and in so doing become part of the “globalist conspiracy”? What happens if society is polarised? Then which side do we take as a reference point? Or, does a company manifest different values depending on where it works and the predominant social values therein? What we have here is just a starting point, but hopefully it puts some tangible shape to the concept.

Conclusions

The above six political risk-related concepts or terms were something of a hodgepodge. There could have been other ones, or more. They are, though, windows on the broader political risk concept, and in shedding light on these we might provide more overall clarity on the dynamics and variables relevant to a company’s relationship with the wider world. A natural question at this point is “how do we understand, plan for and act on these and related phenomena?” That is important, but an effective “how” depends on a clear sense of “what”. Hopefully we have shed a bit more light on that. These are not the only conceptualisations out there and others are valid too. It might be nice to reach consensus on these and related concepts, but as we noted at the beginning, being too rigid or reductionist would not be helpful either. Some things cannot be tidily boxed, and some ambiguity allows the flexibility to frame and interpret according to different contexts. One could even suggest that we should not feel any particular attachment to existing concepts, but for now we need to start somewhere, and the existing language around political risk has at least made some inroads into business consciousness.