Scenario planning and forecasting are essential not only to predict and confront risks, but also to collect data and knowledge on geopolitical trends. Both within and across industries, corporations have a shared interest in understanding these trends to ensure a stable market environment. Corporations generally lack their own intelligence-gathering mechanisms — costly private services are available that cover the spectrum from risk assessment to site surveillance — so the private sector should engage with governments in partnerships to improve their collective capacity to track and evaluate threats.
Cooperation with government agencies provides both long-term understanding and short-term analysis. This collaboration is also called for in the National Strategy for Homeland Security, which recommends the development of protection plans for 14 “critical infrastructure sectors.” Lead agencies within the government have been assigned to work with the private sector to devise collective risk-mitigation strategies.
Separate industries can also work together under government auspices to build long-term risk perspectives, through scenario planning and wargaming. This was done during the development of the U.S. National Intelligence Council’s Global Trends 2015 report, a multiyear research effort that involved considerable consultation with the private sector and academic community. Though such activity requires overcoming certain Freedom of Information Act restrictions, the post–September 11 climate makes collaboration more feasible than it was before.
Operationally, political stability at the regional, national, and local levels contributes decisively to investment decisions. Risk analysis of specific country stability has improved considerably over the years, though it can never be considered an exact science; no one truly knows what the outcome of a China–Taiwan conflict would be, for example, nor are flare-ups between India and Pakistan predictable. However, there are examples of risk analysis instruments that supply “early warnings” about critical trends and provide a way to measure a country’s capacity to withstand political, economic, security, and social shocks. The Lehman Brothers Eurasia Group Stability Index (LEGSI), for example, analyzes social and economic data from more than 20 countries. Eurasia Group’s founder and president, Ian Bremmer, points out that some of LEGSI’s “political findings can be counterintuitive to market analysis, in that they are forward-looking indicators of social trends and industries.” (LEGSI analysis picked up on Latin America’s social ills before the markets did.)
Risk assessment and resilience planning must become a CEO-led priority. Most companies have now come to terms with the pace at which the business environment changes, but it remains quite another task to understand these transformations and integrate them into more flexible corporate strategies and operations. The inspiration for thorough consideration of such underlying issues will have to come from corporate leadership: CEOs must demonstrate commitment in order for their firms to grasp the geopolitical “big picture.” In an era of endemic globalization risks, strategic guidance is necessary to separate “red herring” risks from those that can indeed have an impact on firm strategy. CEOs must avoid conflating scenarios of such low probability that they require only contingency plans to stay in the market (e.g., technical malfunctions) with those that require strategic rethinking, such as market failures and political shocks. If scenarios and the risk horizons contained within them are properly understood, there can be upsides to not reducing exposure.
CEOs, however, cannot develop an overview of the entire world of risk and its rapidly changing dynamics by themselves. Though CEOs must be trained to differentiate between first- and second-order risks, they must engage senior managers in teams to examine the functional sites of risk and devise mitigation strategies to be incorporated into operations. Knowledge of risk scenarios must be rapidly diffused through management via tailored “political risk templates” that bring together relevant principals for risk-factor analysis in specific risk areas. Particularly in light of the geographically diffuse nature of political risks today, such a strategy will also empower managers around the world to develop crisis leadership skills, which are essential in the event of communications disruptions within a firm.