Hindsight is a wonderful thing, but if companies could have foreseen the UK’s exit from the EU before the referendum in June 2016, things might look very different for British businesses. As it stands, the extra bureaucracy involved in trading with Europe has upended many SMEs’ business models.
If only there had been a global geopolitical expert on hand to warn of Brexit’s implications and to counter the market view that it wouldn’t happen. Such expertise might have helped companies get ahead of the issues, says Mark Freebairn, partner and head of the board practice at global headhunter Odgers Berndtson.
Unfortunately, that lack of foresight has had a resounding impact on economic confidence, even in the seemingly placid world of recruitment. “Economic confidence defines whether or not you’re prepared to pay our fees when it comes to hiring someone,” says Freebairn.
The days when geopolitical risk was not something most companies needed to worry a lot about are long gone; it’s now a board-level issue
And it’s not just Brexit. The impact of geopolitics on global companies has increasingly made the headlines in recent years. For example, Covid-19 affected 16% of UK businesses’ supply chains, while significant disruption hit as many as 30% of firms in manufacturing, wholesale and retail. Meanwhile, the war in Ukraine and its impact on energy bills in Europe mean that many small business owners will struggle to keep the lights on in the months to come.
“The repercussions of conflict and inflation are people tightening their belts, which is ultimately going to reduce the demand for services,” says Jeff Maggioncalda, CEO of online training provider Coursera.
Other issues, such as the trade tensions between China and the US, are also of major concern. The two nations account for 76 of the world’s 100 most valuable companies, and technology has become a geopolitical battleground, particularly when it comes to regulating 5G and artificial intelligence.
Global impact
Of course, the extent to which businesses are impacted by conflict, bilateral tensions, terrorist attacks, trade wars, tariffs, sanctions and the rest depends on the exact nature of the company and where it operates. But as the economy has become more global and interconnected, geopolitics is undoubtedly having a greater impact on small, medium and large companies across the board.
It’s more important than ever for companies and their CEOs to be able to tap into genuine geopolitical expertise. But where can they get this, and how should it feed into their work?
Chon Tang is founding partner of Berkeley SkyDeck Fund, a high-tech entrepreneurship startup accelerator based in Silicon Valley. He says companies in the space rely on word of mouth to navigate new geopolitical challenges. “We’re all just in the early stages of understanding how government interaction is affecting supply chains, investors and future M&A deals. A lot of CEOs are concerned, but very few have solid answers.”
For Iain Pickard, COO of risk services firm Sigma7, it’s worth taking seriously. “The days when geopolitical risk was not something most companies needed to worry a lot about are long gone; it’s now a board-level issue.” He advises CEOs to “look at your global operations to figure out where you’re exposed and then seek help from the experts”.
Beyond what CEOs are sharing by word of mouth, such expertise isn’t readily available among ordinary top-tier management structures. Freebairn says those with the relevant knowledge – typically at a governmental level – aren’t necessarily motivated to use it to enhance companies’ competitive advantage. As a result, it’s often brought in temporarily at an executive level, through a non-exec on the board or via consultancies.
Looking within
The need for geopolitical knowledge varies according to the business. Of course, there’s a vast difference between the needs of a defence company and a supermarket. Geopolitical expertise is fundamental to operations at Sigma7, so it makes sense that its executive deputy chairman is a former deputy commander of NATO and can access networks that provide deep insights on a country-by-country basis. For example, someone in Peru, where a Marxist government has recently been elected, can translate what that means for the mining industry. Someone conversant on Egypt knows that the price of bread is a significant political issue and that rising grain prices may cause social unrest.
But the answer to the problem of sourcing geopolitical expertise may already be within reach. Even if there’s a distinct lack of expertise in the upper echelons, many companies are actually missing out on pre-existing insights among their employee base. “We don’t seek out geopolitical experts,” says Maggioncalda. Instead, Coursera has country specialists who understand consumer and business trends and what’s happening with individual governments. “Our geopolitical insights come from the business model.”
Professors Andrew and Nada Kakabadse from the University of Reading’s Henley Business School have noted that many senior managers already understand the impact of local politics and geopolitics on their global company. These country heads, divisional heads or subsidiary managing directors face the market and communities and are held accountable for sales and local performance. However, these general managers are continually ignored by top-level management, according to the professors, and excluded from initial discussions on strategy creation where geopolitical risks may be picked up.
Buying in expertise via non-executive directors or consultancies can only get you so far. Companies may be better served in the long term by building a broader knowledge base through the diversification of their workforce and digital transformation.
The solution, then, might be to consolidate the geopolitical knowledge that’s already available to a company’s decision-makers, expand that pool, and support it with external expertise where necessary. Then it’s just the small matter of learning from that insight and preempting the unknown.
