Geopolitics in Governance: A veteran board member and former senior U.S. government official suggests how directors can best address the risks of international business.

• Author: Lader, Philip
• Position: THE AGE OF RISK: Political Risk

Boards can little afford relegating anticipation of tomorrow's international news to scriptwriters of screen life's "Homeland," "24" and "Madame Secretary." For the organizations directors serve, the significance of geopolitics, broadly defined, can be momentous.

Effective directors must continually be alert to both world affairs and little-noted trends. The board should help inform and temper management's operational reactions to events far and wide. A broad spectrum of policy issues, transnational to locale-specific, must be routinely considered. Neglecting to reassess the enterprise's long-term strategy with practiced eyes on developments around the globe amounts to ignoring formidable risks and forgoing significant opportunities.

The term "geopolitics," referring to geographic influences on power relationships in international relations, came into scholarly parlance in the early 20th century. A broader, contemporary usage stems from expositions by Henry Kissinger and recent commentators; and the even more comprehensive notion of "geopolitics" in today's vernacular can be traced, in part, to on-screen dramas and airport bookshop novels. As an academic field of study, this discipline looks backward to discern patterns indicative of future possibilities. In practice, geopolitics demonstrates that, as attributed to Mark Twain, "History doesn't repeat itself, but it often rhymes."

Since World War II, the number of countries has doubled; international tensions have re-intensified; power has transitioned between, as well as within, nation states; and non-state actors have garnered unprecedented capabilities to affect world order. Although Francis Fukuyama's influential 1989 essay proclaimed "The End of History," he now acknowledges that the eventual global triumph of political and economic liberalism is in question.

Markets, supply chains and even overall company performance and valuation are therefore profoundly affected by much more than the tectonic moves of major world powers. Potentially neglected incidents--from Wuhan to Minneapolis--can define an era. This presidential election year, amid a pandemic, is marked by disruption, volatility and uncertainty. And no organization is immune from their consequences.

Geopolitical risks and business

Some companies undeniably have greater exposure to geopolitical risks than others; but regardless of size, mission, footprint, markets, or products and services, no 21st-century enterprise can escape the impact of geopolitics. Currency valuations, environmental and labor regulations, taxes and tariffs are but the most obvious concerns. To avert unwelcome, costly surprises and reveal occasions for competitive advantage, the board's disciplined attention to an ever-changing array of pertinent international issues, as well as geographic- and nation-specific questions, is critical.

The requirement of boards is not merely to monitor events or to identify "trouble spots." Responsible directors, whatever their professional backgrounds, must stay informed regarding international trends and phenomena posing threats to their firm's industry, stakeholders, markets and customers, labor pool, supply and production chains, cost structure--even its fundamental business model.

The corporate board must integrate more frequent and detailed geopolitical risk analysis and scenario planning into decision making. Management's sources of information and processes for discerning emerging issues should be evaluated. In this way, investment impairments may be avoided, reduced levels of return on investment...