How managing political risk helps improve business performance*

As the interrelation and interdependency of global markets continues to increase, firms are taking on greater international exposure than ever before. Conflict in the Middle East, terrorism, and pandemic diseases threaten the safety, security, and continuity of global business operations. And the recent surge in published and unpublished incidents involving business setbacks - contract renegotiations or cancellation by host countries, increases in taxation driven in part by political agendas, or impromptu exits from countries after significant investment - have been influenced by political agendas.

What’s new today is a crucial and growing gap between the willingness of corporate executives to accept rising levels of political risk in search of greater economic rewards and their ability to adequately protect business performance and economic value by managing this risk in a consistent, efficient, and systematic manner. By integrating political risk into your firm’s investment decisions and Enterprise Risk Management (ERM) processes you can better understand your global exposures and balance the company’s risk appetite against achievement of corporate objectives.

If this is your situation

• You are entering into a merger or alliance with a foreign company and need to evaluate political risk factors that will impact your investment.
• You are outsourcing or offshoring critical business operations, or managing global supply chain and distribution channels, and need to understand the country-specific governmental, economic, and societal forces that will impact performance results.
• You are making global investment decisions and need better insight into key issues such as the impact of regime change or local elections on investment timing, how nationalisation impacts your ability to operate in a region, or how mid-stream changes to regulations will impact your compliance posture.
• You want to better understand global compliance issues, including bribery and corruption, in high risk countries. Global regulatory requirements across safety, environmental, security, and privacy have resulted in investigations and fines, increasing the overall cost of doing business.
• You need an early warning of a problem or opportunity presented by political shifts, and you need to put in place contingency plans to protect your company from potentially extreme consequences of political risk.

At PricewaterhouseCoopers and Eurasia Group, we know from experience that, because political risk can be anticipated, it can also be measured and managed. Corporations can proactively manage the risks of globalisation by taking the following actions:

• your current political risk exposure and determine your level of preparedness . Examine the quality of your existing controls and the adequacy of your risk mitigation plans relative to the business risks you’ve identified.
• Develop methods for risk-adjusted evaluation of international risks and opportunities through scenario planning that leverages comprehensive political risk information to weigh investment and operating opportunities and develop associated risk mitigation steps.
• Embed political risk considerations into your strategic decision-making and risk management frameworks and ongoing business operations to make better and timelier decisions about international investments and operations.
• Incorporate the components of political instability into your capital allocation assessment process and ongoing management of your global operations.