GEOPOLITICAL DISRUPTION: Invades the Boardroom: Directors should plan for risks in talent, supply chain, public health and more.

• Author: Essenmacher, Erin
• Position: A WORLD OF RISK

The notion that every company is a technology company became a popular idea over the past decade, as advancements in software, data analytics and artificial intelligence profoundly transformed the business landscape. Companies of all stripes are now coming to recognize that the same holds true when it comes to thinking globally. The past three years have provided a master class in how quickly events that were once considered black swans can become a cascade of real-time risks that require a significant shift in the approach to both company strategy and risk management.

EVERY COMPANY IS A GLOBAL COMPANY

Overlapping shockwaves of a worldwide pandemic, historic supply chain shortages and war in Europe have reinforced that companies of all sizes, across industries, are impacted by disruptions as far-flung as Wuhan or Kyiv. "The interconnectedness of the world's economies is significant. This is true despite protective measures countries have taken, starting with the Great Financial Crisis and continuing through the US-China trade wars, COVID-19 lockdowns and the Ukraine conflict," says Krishna Kumar, VP, international, at the RAND Corporation. "Supply chain risks that had started becoming evident during COVID-19 have been amplified by the conflict in Ukraine. It illustrates how events not exactly in our backyard can cause serious disruptions to companies and societies." He points out that while the disruption is most immediate for companies that fled Russia either because of sanctions or public pressure, "other companies that do not directly have business in Russia and Ukraine are also impacted due to shortages and increasing prices."

The need for a geopolitical-centric lens on risk is in many ways the result of converging risk factors that have emerged over the past few decades, says James Lam, president of risk management firm James Lam & Associates and a director for Recology (where he serves as chair) and RiskLens. "In the 1980s, we thought first and foremost about financial risk. In the 1990s, companies started focusing more on operational risk. Then digital transformation meant companies were thinking more deeply about strategic risk. Geopolitical risk compounds and connects all these risks in a way that is very significant, and that I haven't seen before."

Russia's invasion of Ukraine is the latest crisis to reveal the compounding nature of global risk. "It underscores the increasing link between business and economics on the one hand, and geopolitics on the other," says Kumar. "It means companies might have to pursue strategies that are as geopolitically savvy as they are business-sawy."

FROM "JUST IN TIME" TO "JUST IN CASE"

Even the boards of larger multinational companies, which may already have geopolitical risk firmly on their radar, have found they must seriously reconsider old assumptions that no longer hold true. "I'm on a Swedish board," says Nora Denzel, who serves on the boards of Advanced Micro Devices, Ericsson, NortonLifeLock and SUSE. "Five years ago, we still believed that there was global trade. But then Xi Jinping came out with the China 2025 plan and it became really clear that the two big guys were drifting apart. The technical standards are bifurcating and now we have to think about what China wants. What does the U.S. want? And then try to make sure that we stay on the right side with both."

Geopolitical shockwaves have also upended long-held views about supply chain risk. Over the past three decades, the focus on "just in time" manufacturing emphasized efficiency as companies took advantage of interconnected free trade to reduce surplus inventory. The assumption that a lean supply chain was a risk-mitigation best practice has been suddenly--and painfully--turned on its head.

Myrna Soto, who serves on the boards of Consumers Energy, Spirit Airlines, TriNet, Popular Inc. and Headspace Health, has felt the impact of supply disruption across her board portfolio but says the multipliers of that risk are felt most acutely in the energy space, a backbone of critical infrastructure.

"The production of energy requires a lot of heavy equipment that has components that are manufactured all across the globe, so that has become an area of risk that we are focusing on significantly. We look at timelines and timetables for delivery because we can't just say, 'Whoops, can't do it.' When you are providing critical power services, it has to be done."

Supply chain woes also mean companies that considered efficiency as synonymous with risk mitigation are taking a very different tack. "Now we're willing to take on more capital allocation for financial bets that might not have 100% clear return, but we do it just in case," says Denzel. "We really looked very closely through the supply chain, identifying second sources or third sources. We've even talked about whether to make sure it's all sourced from America, because that's about the only thing you can trust."

Kumar recognizes this as well and urges corporate leaders to rethink investments in infrastructure based on inputs from a single source. "There is a company-level parallel to the large investment sunk into the Nord Stream pipeline to transfer natural...