Craig Martin, Director, Executive Programs and Treasury Practice Lead, AFP
At the first AFP Executive Roundtable of this quarter, I asked the attendees whether they discuss geopolitical risk when they hold meetings on risk management issues. Everyone in attendance had something to say, so I suppose it’s fair to say that geopolitical risk is a key concern for treasury and finance executives.
First let’s define geopolitical risk so we’re all on the same page. Political risk, also known as geopolitical risk, is the risk an investment’s returns could suffer as a result of political changes or instability in a country. According to Investopedia, instability affecting investment returns could stem from a change in government, legislative bodies, other foreign policymakers or military control. Some recent examples of geopolitical events include the attempted coup in Turkey, terrorist attacks, the migrant crisis, Syria, the Brexit referendum, and upcoming elections in the U.S., France and Germany.
The changing risk landscape
Going back to the roundtable discussion, the first response came from a treasurer of a global quick service restaurant business that has many locations in southeast Turkey. That obviously could have been and might yet still be a problem. The next voice to chime in was a treasurer of a tech company who said his three most problematic countries were Egypt, Nigeria and Argentina. He picked some doozies! Another treasurer who works for a company that sources copper from Latin America stated the obvious about that region, which was it is unstable at best. And so on.
So yes, geopolitical risks have entered mainstream conversations when treasury, finance and operations people are discussing risk. I began looking at this issue back when I wrote my 2016 outlook article, wondering, or should I say posturing, as to whether geopolitical risks had entered anyone’s lexicon yet. As you can see it certainly has now. In fact, it wasn’t too long ago that an article appeared in a McKinsey publication touting that it was high time that the C-suite and boards began seriously considering geopolitical risks in their discussions.
The following are three key things treasury and finance executives need to understand in this age of escalating risk.
All new regions carry new risks. Know them.
As featured in a recent article in September’s AFP Exchange magazine entitled, “Cracking the Code ”, geopolitical risk is mentioned as one of the newer risks to be aware of and should be taken into consideration when weighing the deployment of capital. As has long been said about certain countries in Latin America, particularly Venezuela, when entering these regions, one has to go in with “eyes wide open.” As we’ve seen in the past there and even in Argentina not too long ago, suddenly your assets can be taken over by the country, and there’s nothing you can do. So while there are (revenue) opportunities in those types of places, be aware of the risks that are or could be extreme.
No company is immune to a crisis. Don’t assume that you’re safe.
An even more extreme view on this subject was presented in a piece that appeared recently on the online news site, BRINK, entitled, “Out of Thin Air: A New Definition of Crisis .” The opening paragraph stated, “Your company is in crisis, but it’s not because something inadvertently went wrong. You didn’t try to take a shortcut and get caught. Your product did not make people sick. No laws were broken and nothing exploded. None of the traditional things that we label crises happened. Instead, your business is in crisis because of what it does.”
Some examples of what this means are what happened to the tobacco industry when the surgeon general released his report on the link of smoking and cancer and when several drug companies got caught on theoretical price gouging for certain products, which resulted in a public outcry. The article goes on to say, “In each of these examples, the onset of the ‘crisis’ was remarkably quick and its impact significant. It also speaks to how any company in any industry could be affected.”
Technology is your friend. Use it.
Going back to geopolitical risks, today we woke up to reports of another nuclear test by North Korea. This is why finance professionals need to be employing the latest tools and technology available to help better predict what might be coming, or at least try to look around that corner. These examples and I’m sure many others you can think of are the epitome of substantial and severe risks that lurk out there.
For an even deeper look at geopolitical risk, don’t miss Dan Burns,economics and markets editor, Americas, for Reuters, on Monday, October 24 at the AFP Annual Conference. Burns will provide insights on how financial professionals can look for opportunities in the current uncertain environment.