The shifting geopolitical landscape is a top risk for business leaders, though executives often struggle with implementation of risk plans across organizations, according to a senior risk strategist at McKinsey.
Ziad Haider, a partner and global director at McKinsey, said geopolitical risk isn’t typically managed in an integrated way across companies, with internal teams adopting a somewhat myopic approach. A reliance on research insights from external partners might not be tailored to an organization’s needs, he noted.
“Internal teams are giving quite fragmented views, so if you look at a market, the security team will be talking about the people risks, the finance team will be talking about currency controls…sometimes those worlds just don’t meet,” Haider said at The Wall Street Journal Chief Compliance Officer Council Summit in London on Thursday. “If you're a leader, risk is risk – it's not financial or legal, or reputational…how do you pull that together?”
Haider shared his insights as executives are increasingly identifying geopolitical risk as a top business concern. Geopolitical instability and conflict was the most cited risk to global growth, according to a March McKinsey survey of professionals across industries. Separately, a U.S. Bank CFO survey earlier this year found that rising geopolitical worries around global conflicts and war are driving hedging strategies, CFO Dive previously reported.
A coordinated approach to ‘black swans’
The need for organizations to prioritize geopolitical risk becomes especially important in a fragmented world, suggested Haider. Consequential events include U.S.-China competition; conflict in the Middle East and Europe; and upcoming elections, he said. At the same time, artificial intelligence is reshaping business, politics and society, he said.
In developing a framework to evaluate geopolitical risks, companies should look at three areas, he said. They should focus on getting insight, or inputs on geopolitical issues and developing a system for it; establishing oversight for the risks including board-level involvement; and developing foresight, an organization’s capacity to assess emerging risks, opportunities and threats.
Companies need to leverage the lessons of Covid, the Ukraine war and other threats, in their efforts to anticipate risks, he said.
In evaluating geopolitical risks, scenario planning can help put potential implications into context. These include “gray rhinos,” or known risks of high impact, and “black swan” events, which are those that aren’t easily foreseeable.
With regard to black swan events, “it's sort of an academic exercise to put names to it, but if I were to look around the world and think of things that are at the edge of my mind, versus at the fore of my mind, I think of the situation of the Korean peninsula…[and] another pandemic — no one says these have to happen once a century,” Haider said.
‘Eye in the sky’
Organizations seeking to gain an understanding of geopolitical risks should take an overarching “eye in the sky” approach to geopolitical risk management, he said, with efforts to scan risks and opportunities and identify which are most consequential. Organizations, he noted, should also evaluate risk versus return scenarios for different markets.
“How do you separate, amidst this cacophony, the noise and the signal, [and] zoom in on the things that matter,” Haider said. “As you scan the globe…there's that kind of satellite like almost how you scan for weather patterns.”
It’s also important for risk oversight units to be empowered to execute, he said.
“I see some of the tech firms put it in the government relations teams. I see financial services firms put it in their risk functions…if it's not embedded, and also ideally have some form of a leadership sponsor, it will not really add up too much,” he said.
