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In 1947, after victory in the Second World War, the United States consolidated its position as a global power. It was now bound to shape a new international order and to face the Soviet competition in the emerging Cold War. Secretary of State George Marshall understood the critical importance of strategic geopolitical analysis in that new global competition. He decided to establish the Policy Planning Staff (S/P) at the Department of State. It was designed as a unit directly linked to the Secretary´s office, tasked to provide long-term geopolitical thinking, assessment, and advice. Marshall invited the diplomat and grand-strategist George Kennan to be the first S/P director. Kennan was already a myth in foreign-policy circles for his Long Telegram, which analyzed the sources of Soviet conduct and suggested the strategy of “containment”. Marshall´s advice to Kennan on how to guide the work of the new geostrategic unit was simple: “Avoid trivia!”
In his memoirs Present at the Creation (1969), Secretary of State Dean Acheson defined more precisely the role of the policy planning unit: “To look ahead, not into the distant future, but beyond the vision of the operating officers caught in the smoke and crisis of current battle; far enough ahead to see the emerging form of things to come and outline what should be done to meet or anticipate them.” Over the following years, the policy-planning model would be adopted as best practice by all major foreign ministries in the world, connecting practical strategic thinking on geopolitics with foreign policy strategy.
For more than three decades since the end of the Cold War, global corporations seemed to be navigating a geopolitical risk-free world. The process of economic globalization spread out of the US and Western Europe to encompass the whole world, promoting the integration of markets through trade and finance. Companies and corporations, taking advantage of new technologies and lower transportation costs, reorganized their production on a global scale by dispersing geographically their activities and functions. Global and regional supply chains intertwined countries and regions in the international flows of investments, trade in goods and services, financing, research and development, logistics, and trans-border transportation.
The business world seemed to be flat. But it was not. It rested on an extremely unflat geopolitical world: With undisputed power and acting in concert with its allies in Europe and Asia, the US was enjoying a rare moment of absolute geopolitical primacy. The preponderance of US power was shaping the geopolitical environment of the global economy. This unipolar situation provided geopolitical stability, safeguarded the security structure of sea-lanes which are vital for international trade flows, and universalized the governance institutions that guaranteed a rules-based framework of trade and finance. Think, for instance, of the establishment of the World Trade Organization (WTO) in 1995 as the first universal institution promoting trade liberalization among market economies.
Fast-forward 30 years, and the geopolitical landscape has been completely transformed. Almost like the movement of tectonic plates, often imperceptible and sometimes disastrous, geopolitics constantly shapes and impacts the global business environment. Today, great-power competition and geostrategic rivalries are redrawing the global map and, in the process, disrupting investments, affecting supply chains and cross-border trade flows, changing the rules of the game in multilateral institutions. Great-power rivalries, such as the long-term US-China geostrategic competition or the war of attrition in Ukraine, just to mention two of the most visible developments, are reshaping the geopolitical map of Eurasia and creating a new strategic environment from Europe to the shores of the Indo-Pacific. There is a growing misalignment between the new geopolitical balance of power and the rules-based architecture of the international order.
In a world of increasing geopolitical complexity and volatility, understanding geopolitics and geopolitical risks is an indispensable component of corporate strategy. Building on Marshall’s insight, it is time to bring Kennan to the boardroom.
Indeed, recent surveys conducted by EY and the Center for Board Matters show that corporate boards and companies are increasingly concerned with geopolitical risks. In 2019, EY found out that 62% of 1000 global C-suite executives considered geopolitics to have a very high or high impact on their companies and operations, including supply chain and trade disruptions. However, according to another survey by EY (Geostrategy in Practice 2021), while 40% of boards regularly assess the impacts of geopolitical risks on the company´s existing strategy, only 25% of boards regularly considers geopolitical risks as part of making business decisions. It is estimated that almost half of corporate boards do not have any formal process to identify and assess geopolitical risks impacting their strategies and operations.
So what should be done? The challenge is to structure geopolitical insights into the boardroom. Companies need to adopt what I call “corporate geopolitics” as part of their corporate governance. In order to manage global geopolitical risks, explore geopolitical opportunities, and assess geopolitical impacts, companies need to design a process that integrates geopolitics into corporate strategy and the boardroom decision-making.
Geopolitical knowledge and experience are fundamental. However, for corporate geopolitics to be effective, geopolitical substance has to be coupled with the right geopolitical framework and the right structure and processes at the boardroom. A tailor-made geopolitical framework offers the proper analytical methodology for filtering international events and trends into actionable geopolitical insights for business decisions.
There are, broadly speaking, two categories of geopolitical risks affecting the political environment of corporate strategy and international business. The first are systemic geopolitical risks, which impact all industries, albeit in deferent degrees. They are macro geopolitical events and trends, associated with the global balance of power, the parameters of the world order and international rules (e.g. the transition from a unipolar world in 1991 to a bi-multipolar structure today). The second are specific geopolitical risks, frequently connected to systemic ones, and they impact specific industries, firms, and business operations. These are micro geopolitical events, generally regional fault lines, local country-specific developments or national policies impacting core markets for the corporation, trade and investment conditions, supply chains, manufacturing inputs, and operations (e.g. the war in Ukraine and its impacts on food security, commodities trade, logistics, and operations).
Boards have responsibility for the quality of strategic decisions, and geopolitical risks will increasingly affect those decisions. Corporate geopolitics must respond to the unique needs of corporate strategy and boardroom decision-making. Achieving effectiveness in the implementation of corporate geopolitics requires the combination of the proper geopolitical framework with the proper structure and processes at the board:
1. Organization structure at board level.
The practice of corporate geopolitics needs to be at the highest strategic level of corporate decision-making. A member of the board, ideally a former senior government official versed in foreign policy, should be appointed “chief geopolitical strategist” (CGS). Working with a very compact team at headquarters, complemented by local, country-specific teams at other business locations, as well as by insights from leading experts, consultants or specialists in the field, the CGS will provide strategic thinking on geopolitics for the boardroom. The CGS and the geopolitical team should, whenever necessary, work with the government or public affairs teams, but they should not be combined. Though political in nature, the functions of corporate geopolitics and government relations are different in method and objectives.
2. Applied geopolitics linked to strategy.
The main task of the CGS is to build geopolitical resilience for the corporation. Geopolitical analysis and scenarios, based on the realistic assessments of the geopolitical landscape, should be actionable and tailor-made for the needs of the corporation and its overall strategy. Mapping the global geopolitical landscape ultimately aims at informing and supporting strategic thinking and deliberations of the boardroom. The CGS will identify, assess and monitor key geopolitical areas of sensitivity and their impact on the company. There are excellent firms providing geopolitical analysis and intelligence, but this wealth of information, unfiltered by the right geopolitical framework and specific needs, will be neither actionable nor relevant for corporate boardrooms and companies.
3. Process and business impacts.
Geopolitics is always evolving. Geopolitical-risk management is a process, not a product. The right geopolitical framework for identifying and assessing geopolitical exposures at both the strategic and operational levels requires a well-designed process from briefings and communication at the boardroom to information sharing inside the organization, including two-way alerting tools. Corporate strategy discussions and major investments decisions of the company should always be submitted to a “geopolitical stress-test” at the boardroom. These processes will create inevitable synergies between strategy, risk management, and operation in building geopolitical resilience.
A final word of caution. Geopolitics affects the global business environment of companies. But companies cannot control geopolitics or play the geopolitical great game as a political actor. Companies are actually ill-equipped for playing that game and they will eventually lose, whenever they try to confront real geopolitical actors. Corporate geopolitics is about managing and leveraging the external geopolitical environment for strategic purposes, not about companies having their own foreign policy.
Geopolitical risks cannot be avoided, but they can be leveraged and managed. What companies and corporations can and should do is to explore the opportunities presented by geopolitics and manage the risks as part of their strategic vision and objectives. In a systematic and continuous process at the boardroom, corporate geopolitics can build a position of geopolitical resilience for companies to navigate a complex and volatile world.
The article was first published here.
Photo by GeoJango Maps on Unsplash.
