John F. Phillips, MA
Political risk. It’s not something that many business owners and business professionals think about as they go about the day to day operation of their businesses. They should.
Political risk is a big deal. If you have been reading me for awhile, you understand that I am a true believer in the proposition that politics impacts everything. I’m not talking about all of the bovine scatology that people talk about on Twitter, cable TV opinion shows, and other such forums. That is nothing but static and part of the “infotainment” echo chamber.
When I talk about political risk, I am talking about recognizing and understanding specific political events, trends and behaviors and how they impact the operational environment of business in both the short and long term. Once these events, trends, and behaviors are recognized and understood, they then have to be managed in order mitigate the impact that they have on a business and its operation.
Back in 2018, former Secretary of State Condoleezza Rice and Stanford Fellow Amy B. Zegart wrote Political Risk: How Businesses And Organizations Can Anticipate Global Insecurity. In the book, Rice and Zegart discuss the importance of understanding and managing political risk and offer an elegant methodology for doing so. I reference this work all of the time.
I want to share their definition of political risk analysis because I think it really drills down on why understanding political risk is so important:
“The goal of political risk analysis is not to predict the future. It can’t be done. The goal is to create better decisions for your organization by developing insight about key drivers and possibilities.” (Rice, Zegart, 2018, p.169, italics mine)
What might some of these key drivers be?
- election results
- leadership succession of political parties
- legislative initiatives
- political factors driving economic policy
- political factors driving foreign policy
- political factors driving regulation
- political factors driving financial markets and investing
This list isn’t all inclusive, but you get the drift. Political risk is everywhere. It can rear its ugly head anytime, and at times, unexpectedly. It’s a big deal.
Understanding and managing political risk isn’t something that is quantifiable on a balance sheet. It can’t be easily measured in dollars and cents, but it sure can impact the bottom line. Political risk management takes effort, commitment, and, perhaps most importantly, buy in from leadership. History is littered with examples of firms that have either ignored or failed to manage political risk. They did so at their own peril.
Given the dynamics of the world today, understanding and managing political risk can offer a comparative advantage in business and cannot be ignored.
What are you doing to understand and manage political risk?
What political risks concern you most?