Global conflicts, tensions and elections have inevitable knock-on effects on the way businesses operate. The war in Ukraine forced companies, including Ford, H&M and Nike, to suspend operations in Russia. Meanwhile, Starbucks and McDonald’s have faced consumer boycotts for their perceived support of Israel in the ongoing conflict in Gaza.
Businesses are having to find ways to operate under increasingly disruptive geopolitical pressures – a fact of which finance chiefs are painfully aware. Geopolitical risk was cited by CFOs as the number one factor likely to pose a significant threat to their company in the next 12 months, according to Deloitte’s Q4 CFO Survey. Top of the list of geopolitical anxieties were ransomware and cyber attacks, an expansion of Russia’s invasion of Ukraine, an escalation of war in the Middle East, unpredictable inflation surges and increased protectionism in global trade.
These fears are keeping CFOs on edge. Worse still, the same survey reveals they don’t know how to respond. Almost half (47%) said they relied on addressing such issues as they arise with only 18% saying they develop contingency plans for specific geopolitical events.
While these risks are largely out of finance leaders’ control, there are strategies they can employ to mitigate their impacts.
The new normal
At a time of increasing market volatility and frequent macroeconomic shocks, businesses should no longer think of geopolitical risk as a singular event. Instead, potential disruptions should be factored into regular strategic business planning and forecasting, says Simone Nardi, CFO at global HR firm G-P.
“Risk is now a certainty, rather than a possibility,” he says. “2024 has been a year like no other – at least 64 countries have major elections taking place and many executives are holding off on making decisions about growth in new markets as a result.”
You can do one of two things: keep doing what you’re doing or use this time as a catalyst for change
This has created a reduced appetite for risk and a more reactive, rather than proactive, approach to dealing with it, Nardi says.
In his view, CFOs should regularly undergo ‘what if’ scenario-planning exercises, exploring how a prolonged crisis or sudden regulatory change might impact the company’s supply chains, revenue streams or hiring practices. For example, finance leaders might track how different supply chain disruptions could impact production costs, input prices and shipping and then set several possible scenarios that represent different outcomes, including best and worst cases.
“Ultimately, these things are going to happen whether the CFO likes it or not – so being aware upfront and consistently monitoring the risks and opportunities is key,” Nardi says.
“But finance chiefs should be careful not to fall into the trap of making this a purely monitoring exercise,” Nardi warns. “The days when financial planning and forecasting was just a centralised exercise done in Excel are gone.”
This means having concrete, ready-to-implement plans in place for potential disruptions, such as supply chain rerouting, financial liquidity management, integrating new technologies, securing insurance coverage and crisis communication strategies.
Compliance must come first
Julian Adkins is CFO at UK-headquartered Onafriq, a cross-border payments provider that operates in Africa. He has experience navigating disruptions that have come with working in regions where there is inherent risk. These include navigating the currency crisis in Nigeria, foreign exchange regulations in Ghana and unlocking cash trapped in Sudan following the closure of banks in conflict-affected areas.
In overcoming these challenges, Adkins emphasises the importance of local licences, partnerships and collaboration with regulators. “Doing business in highly unstable markets gives companies the chance to make a real difference. However, this must be underpinned by a watertight regulatory and compliance framework,” he says.
Business cannot afford to be complacent about compliance. For Adkins, this means daily monitoring of FX risks and ensuring the company is up to date with evolving anti-money laundering (AML) regulations. Keeping on top of this is a challenge, he admits, but working closely with local and international legal and tax teams helps him to stay alert to any potential threats.
It’s good to talk about geopolitics
Even the most well-informed finance chiefs cannot predict the future. And major disturbances can arise from seemingly minor catalysts, triggering unexpected changes very quickly. “Businesses do not always have the luxury of preparation – we have to be reactive,” Adkins stresses. “In these circumstances, clear communication and transparency with our boards, partners and customers is paramount.”
However, conversations about geopolitics can be hard to broach. There is a temptation to soften language or avoid some of the more politically charged topics altogether.
“Communication about the political environment is a delicate play,” says Nardi. But being able to talk more openly and strategically about geopolitics can help businesses to grow, manage and protect their revenue streams, he adds.
Risk is now a certainty, rather than a possibility
For Nardi, it’s “down to the CEO and the CFO to better enable more constructive conversations” about such matters with boards. “Clarity of conversation is important when addressing potentially divisive geopolitical issues,” Nardi says. “Keep it factual and focus on what really matters to the business. Problems have a tendency to get bigger the longer you leave them.”
Many finance executives may think they understand the impact of politics on their company. But Nardi argues no one person can be expected to have all the answers. Seeking input from a diverse range of perspectives – from geopolitical experts to colleagues and local partners – can give finance leaders a better idea of how certain niche issues might impact the business.
Ultimately, these are “global problems that require a global perspective,” he adds.
Reducing risk
It’s not possible to eliminate geopolitical risk completely, but CFOs can minimise its impact by making shrewd choices about how they run their businesses. Some leaders choose to diversify their suppliers and production facilities across different regions, reducing the impact of disruptions like sanctions, trade wars or regional instability in any one area. In some cases, moving critical parts of the supply chain closer to home or to stable regions can reduce exposure to risks such as export restrictions or border closures.
“Having a broad geographic spread is a natural hedge to global exposure,” Adkins has found. “We operate in 40 regions in Africa so it is unlikely that all of these markets are going to be impacted at the same time.”
Similarly, tapping into global talent pools and establishing an ‘everywhere workforce’ can allow businesses to diminish dependence on particular talent types and build a sustainable talent pipeline, irrespective of location. “It also means businesses are no longer confined to a specific market and become more resilient against frequent business disruptions,” Nardi says.
Growth in uncertain times
Mark Kerswell is group chief financial officer at marketing agency Incubeta. He believes that, for companies willing to be agile and adapt quickly to changing conditions, geopolitical risk can be an opportunity for growth: “You can do one of two things: keep doing what you’re doing, knowing it’s not working, or use this time as a catalyst for change.”
This could mean rethinking the company’s value proposition or reallocating budgets to more resilient revenue streams. In a previous CFO role, Kerswell acquired a digital media company operating in Lithuania. Following the outbreak of Covid-19 and the conflict in Ukraine, he had to rethink their strategy in the region, both in terms of how they ran the company and how they sold products.
“We doubled down on strengthening customer relationships and deepened our commitment to the region,” Kerswell says. “We showed that we could be flexible and patient – and we took steps to add more rigour into how we run our business and how we allocated capital.”
Disruptions can inspire new thinking and behaviour that benefits the business, Kerswell stresses, but it takes time and effort on the part of CFOs to lead that change.
As finance leaders are called upon to provide advice and insight in the face of uncertainty, their role has shifted away from assessing historic data to predicting potential outcomes. As the global landscape moves from one crisis to another, “risk cannot just be monitored and managed but must be anticipated and turned into an opportunity,” Kerswell says.
