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ON GEOPOLITICAL RISK
Boards can guide companies through geopolitical headwinds
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| The world continues to be deeply interconnected by flows of capital, data, goods, people, and services. At the same time, the global order is experiencing fragmentation, which has pushed geopolitics to the top of both CEO and board agendas.
Geopolitical fragmentation is not just about what is happening with crises in Europe and the Middle East and escalating strategic competition in Asia. We are also seeing the rise of the so-called middle powers, such as India and Saudi Arabia, that are exercising greater economic and political clout.
To be sure, geopolitics is not a new feature for global businesses, but in the past, companies could often choose to deal with it at lower levels of intensity. For certain organizations, it might not have been high on the agenda, or if it was, it was a topic for the chief risk officer. | | | Now, however, in every conversation we have with executives and CEOs, geopolitics is one of the first topics they want to discuss. They might be concerned about ruptures due to internal civil conflict and instability or rising US–China tensions. The reason we’re having these conversations more is because geopolitical issues are no longer just risks to be managed. They raise a fundamental question for every CEO, which is: “Can I remain a global company and, if so, how?”
External fissures are also creating internal fissures within organizations. Geopolitics can be personal, and global companies have different points of view internally. So how do CEOs navigate that and hold their organizations together? Employees, customers, partners, and shareholders expect companies to take positions. In our surveys of CEOs conducted after Russia’s invasion of Ukraine, we found companies were under pressure to do so—resulting in many Western companies withdrawing from Russia altogether.
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| | | “Boards can play a central role in developing, reviewing, and shaping responses to geopolitical risks.” | | | | |
| Boards have to grapple with these questions and think of what is a board’s role in stewarding an enterprise through geopolitical headwinds. Board members are starting by seeking to upgrade their understanding of geopolitics, given the velocity of change. Many are now having to roll up their sleeves to help manage regulatory requirements or engage with government stakeholders. Being informed and proactive is a question of who is on the board and which of their core competencies to engage. Where a board chooses to meet can also send important signals to its employees, customers, and partners. | | | | |
| | | | Ziad Haider is the global director of geopolitical risk and is based in McKinsey’s Singapore office. | | |
| | | | | | | Frithjof Lund on how boards can respond to generative AI | | | As generative AI has come to fruition, boards have largely focused on the risks posed by the new technology. But risk is only one part of the equation. Boards can also use the technology to catalyze change in the institutions they govern and raise management’s aspirations. | | | | |
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