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Geopolitical risk: and how experience of the battlefield might help the boardroom

Rådgivning om selskapsrisiko
Geopolitical Risk

By General Sir Richard Shirreff | December 4, 2019

Geopolitical risk is now an immediate and potentially existential threat not only in Hong Kong and the Middle East but closer to home.

If geopolitics is the study of the influence of such factors as history, geography, economics and demography on policy, particularly on state policy, then geopolitical risks are first and foremost those stemming from the interaction of political entities in the international arena. But the scope is much wider than that and includes other risks such as: military conflict, civil war, terrorism, civil unrest, cyber-attack, the impact of sanctions, country default, epidemics, energy security, climate change - and the list could go on. But the point is that risks cannot be looked at in isolation. Rather they need to be fully understood as part of an integrated risk assessment which considers how risks are inter-related, the essence of the military approach to risk management.

Geopolitical risk impacts all organizations (private and public) globally. Any analysis of geopolitical risk usually means a summary of the usual trouble spots of the world: war in Ukraine; civil war in Syria; Iran and the wider Middle East; the explosion of Islamic terrorism in the western Sahel; North Korea and its nuclear aspirations; China’s emergence as a global economic power and the growing pressure in the Asia-Pacific region as it increasingly flexes its muscles.

However, geopolitical risk is now an immediate and potentially existential threat closer to home. Go back a few years and who would have thought that the stability of Hong Kong and its position as the nexus between China and the rest of the world would be in jeopardy. Closer to home, consider the U.K. in 2012, host to the London Olympics, an event which sent a great message to the world of the U.K. as a stable, diverse country at ease with itself and which, by and large, had come through the worst consequences of the crash of 2008. Who, then, would have forecast that within seven years the U.K. would have descended into the current political chaos and that the very existence of the United Kingdom as a union would now be open to question?

So where did all this come from?

First, the global landscape is increasingly fragile and as a result, susceptible to short-term behaviour by corporations and governments alike. Market uncertainty is pervasive and confidence is deteriorating. Many see increased risks of cyclical downturn. Globally, but particularly in the west, frustration with years of stagnant wages, the effect of technology on jobs and uncertainty about the future, have fuelled popular anger, nationalism and xenophobia. In response, some of the world’s leading democracies have descended into deep political dysfunction which has exacerbated, rather than quelled, this public frustration. Unequal societies are polarizing. The paradox is that while we have seen historic reductions in poverty, the social contracts that have held society together in many countries are fraying. For some this has been an era of unparalleled resources and technological advancement but for many it has been a time of increasing insecurity.

Second, trust in international and official institutions is crumbling and the rules-based international order is under threat as it has not been for seven decades. The global security environment remains in fluid transition, addressing insecurity associated with the perception of unsolvable challenges. Add to that the global rise in populism and the success of disruptive nationalist parties in a number of hitherto stable western democracies and that fluidity is now a roller coaster in which old certainties are rapidly being consigned to the dustbin.

Third, the sun is setting on 400 years of a European, or western, centric world, a fact which will prove to be increasingly uncomfortable for those states which have been top dog under the old order. For the fact is that the economic centre of gravity is shifting from the West to Asia, while the balance of power is moving as America retreats from global leadership and China expands its influence. This re-emergence of China as a regional and global player poses profound challenges and opportunities.

Fourth is the increasing recognition that environmental issues, particularly climate change, pose an increasingly existential risk, if not to humanity, then almost certainly to the way we live now. The UN’s intergovernmental panel on climate change recent report stated that if global warming is to be limited to 1.5 degrees centigrade by 2100, man-made greenhouse gas emissions must be cut by 7.6% per annum, starting now. The implications of this are massive but, at the very least, it puts environmental/social/governance risk, so called ‘ESG’ risk, absolutely front and centre of any strategy for risk management. Furthermore, we can expect institutional investors will increasingly demand that ESG risk is addressed before investing in projects in many parts of the world. Increasingly the financial institutions will demand independent assurance that these risks are fully understood and managed; as we are doing on their behalf in the Oil &Gas industry at present.

So how to manage the risks thrown up by these strategic trends? I suggest that the business world could do worse than look at the hard-won experience of the military. While success in recent campaigns in the Balkans, Iraq and Afghanistan has proved elusive and, of course, depends on the definition of success, hard-won lessons have been learned which are relevant in business, among them: strategic leadership, building unity of purpose and understanding with stakeholders; linking risk management to strategy by effective campaign design. It was the master philosopher of war, Karl von Clausewitz, who described the character of war as “the province of danger, exertion, uncertainty and chance where everything in war is very simple, but the simplest thing is difficult”. While business may not be as dangerous, it is nevertheless uncertain; hence the relevance of the military approach to risk management – to be explored in greater detail at the forthcoming Willis Research Network seminar.

Author

General Sir Richard Shirreff
Former Deputy Supreme Allied Commander Europe
Co-Founder and Managing Partner, Strategia Worldwide Ltd

Contact

Hélène Galy
Managing Director of Willis Research Network
Research Manager: People Risks

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