The Rise of Political Risk: An uncertain and volatile political landscape has created an opportunity for internal audit to help the organization prepare for the worst.

Author:Hodge, Neil

It hasn't been a good year for Chinese tech giant Huawei. Last winter, the U.S. asked Canada to arrest the company's chief financial officer, Meng Wanzhou, on spying charges. By mid-May the U.K. government was embroiled in a fight about whether to allow the firm to be involved in developing the next generation of communications networks. Meanwhile, customers were starting to avoid Huawei's products after hearing that Google would no longer allow them to update some Android products, citing U.S. sanctions. The impacts are clear for Huawei, but many other firms were left asking what repercussions it could have on their contracts, markets, customers, and business decisions. How would China retaliate? What other businesses could be caught in the crossfire?

This is just one example of the questions that arise when even a small part of a business is caught up in a revolution or exposed to economic crises, coup d'etats, interstate trade disputes, economic sanctions, or diplomatic clashes. Such risks ebb and flow with the diplomatic tide; however, as businesses become more dependent on international markets and extended supply chains, they are more exposed to political risks.

Risk management specialist Marsh, for example, highlighted a period of

"unprecedented uncertainty" in its Political Risk Map 2019, citing a rise in geopolitical tensions (namely, Russia against the rest of the world) and protectionist sentiments (namely, the U.S. against the rest of the world).

Although companies with multinational operations or overseas supply chains have always had to review their exposure to political risks, most U.K.focused businesses have added the topic to their risk registers only in the past few years. "Up until the election of Donald Trump in the U.S. and the vote for Brexit in the U.K., political risk was always something that companies in other countries had to think about," says Michael Moore, director general at British Private Equity and Venture Capital Association, former Liberal Democrat Member of Parliament, and the Secretary of State for Scotland who helped prepare for the 2014 Scottish independence referendum. "It never even registered that U.K. companies would need to consider their home country as being politically risky."

Worse still, he says, companies have been slow to react. Although Brexit has been a major political and corporate issue for the past three years, Moore says that most U.K. companies have not made any significant preparations for the...

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