By Derek Smith Jr
Managing political risk was the subject of a column I wrote over a year ago. However, since then, COVID-19 has transitioned from a disruptor to a consistent and daily reality for the world. The political risk landscape has changed, as have all other risk categories, and businesses face a fragmented and different geopolitical environment. Forecasts and models may have been useful in the past, but recent events make their limitations abundantly clear. Locally, preemptive management of political risk is also critical as The Bahamas enters a general election scheduled for September 16, 2021.
The EY Geostrategy in Practice 2021 survey found that over 90 percent of executives reported their companies were impacted by unexpected political risks in the recent past, due to policy changes and new regulations because of the COVID-19 health crisis. Additionally, Jones & McCaffrey (2021) posit that political risk must be identified, assessed and managed on a proactive basis by leaders.
As a result, I call on all the candidates for public office, board of director members, c-suite top executives, as well as my regulatory and risk management colleagues to play their part in managing risks responsibly.
In this, the first of a two-part series, three key recommendations will be discussed in brief from a corporate aspect.
Strategically plan for political risks
Business should not be as usual. Political risk should be integrated into the ERM process so that companies have a full understanding of macro risks. Integration such as this can be especially helpful if it leverages quantitative evaluations of political risk and concrete estimations of its effect. Additionally, qualitative reviews can be accomplished by executives, boards of directors and senior management asking themselves difficult questions. Some questions may include:
- Is there any impact on geopolitical agreements or economic and fiscal policy from the change of political leadership?
- Will there be new policies that are likely to drive investments and spending by the government?
- To identify potential disruptors and signals, what mechanisms should be deployed?
There must be a careful balance between being aware of political risks and being engrossed. Board members and executives should be trained on political risk regularly and consult with outside experts. Then, to demonstrate a shared commitment from the top, they should be actively involved in the assessment of political risk as part of strategic decisions. Moreover, top management must challenge any biases you already have (and those of your team) that might prevent your company from spotting surprises or tie them to traditional approaches. True resiliency, the ability to respond rapidly and confidently to potential disruption, can be achieved by a willingness to question what is most likely to happen.
In May 2018, Amy Zegart and Condoleezza Rice, in a Harvard Business Review article, wrote: “Good crisis management can be distilled into five steps: assess the situation, activate a response team, lead with values, tell your story (and be honest) and do not fan the flames.” An organization’s response should not be haphazard and rushed but rather well thought out and strategically positioned. This can only be achieved if the steps above are followed and infused into your organization’s culture.
In short, as a country, companies and people become more agile, political risks can present opportunities. In the second and final article, political risk will be discussed from the perspective of the government and anti-corruption.
Derek Smith Jr is a governance, risk and compliance professional of more than 20 years with a record of leadership, innovation and mentorship. His career has been fortified by holding strategic positions at a TerraLex member law firm, a Wolfsburg Group member bank and a Big 4 accounting firm. Smith is a certified anti-money laundering specialist (CAMS) and the compliance officer and MLRO for CG Atlantic’s family of companies (member of Coralisle Group Ltd) for The Bahamas and Turks and Caicos.