By John Chipman, For HBR.
In February 2014, Russia invaded the Ukrainian peninsula of Crimea, and the following month, it announced Crimea’s annexation. This sudden act marked the beginning of the first major strategic crisis in Europe in a generation and served as a wake-up call to business leaders. As the crisis was unfolding, the Bank of England surveyed business executives on their views of systemic risk and in June published the striking results: 57% cited geopolitical risk as the greatest challenge facing their business, up from 13% the previous year. Subsequent Bank of England surveys have all ranked geopolitical risk as the most challenging risk to manage—above cyberattacks, financial disruption, and even an economic downturn.
Geopolitics is back—just witness the recent Brexit decision, which will dramatically change the future shape of the EU as much as the UK’s relationship to it—and not just in Europe. A more confident China has taken measures to assert its territorial claims in the East and South China Seas. In the Middle East, advances by Islamic State of Iraq and the Levant (ISIL) and its declaration of a caliphate have threatened the territorial integrity of several states. ISIL’s advances in Libya and the activities of other terrorist groups in West Africa have further destabilized governance across large territories there. The internal politics of Africa and Latin America, too, are often mercurial.
Adding to the climate of destabilization, the United States is no longer certain to intervene if the status quo in some region or other is challenged. With no clear “world policeman,” few effective “neighborhood watch” schemes, and a growing number of vigilante groups as well as countries eager to challenge the rules of the game, many parts of the world look and feel unstable. Companies cannot assume, in any region of the world, that the strategic status quo will be sustained by neat balances of power or unbreakable promises of foreign policy assistance from superpower states.
In this new reality, the most successful multinational companies will be those that make expertise in international affairs central to their operations, adopting what can best be described as a corporate foreign policy. Such a policy will have two goals: to improve a company’s ability to operate in foreign environments through effective corporate diplomacy, and to ensure its success wherever it is engaged through careful geopolitical due diligence.
Multinationals operate in many very different environments and in many industries; however, several principles underlie successful corporate foreign policy wherever it is practiced. Adhering to them can provide a new source of competitive advantage.
Geopolitical Risk Today
When my organization, the London-based geopolitical think tank IISS, hosted a workshop for executives in 1994 on the topic “Do companies need a foreign policy?” the session was quite muted. At the time, companies were content to consider the still relatively novel concepts of CSR and stakeholder engagement as part of a global business strategy but thought foreign policy was a step too far. Avoiding politics—standing above or apart from the political fray—was the preferred method for protecting interests and advancing reputation. Now when I speak to executives, most realize that their company must adopt a stronger foreign policy attitude. There are several key reasons for this shift.
The decline of U.S. intervention.
All the challenges to the global order in recent years have been made without any swift or decisive rebuke from America or its allies. It is true that a diverse coalition that includes the United States is engaged in military operations to defeat ISIL, that NATO has seen its sense of purpose in Europe revived, and that the United States is engaged in a “pivot” toward Asia. Yet the speed of events and America’s sluggish reactions suggest that we are in an age of “living tactically” while strategic structural adjustment takes place before our eyes. Future American presidents may be more assertive, but the appetite for intervention among U.S. policy makers and the public alike is on the wane. The world will be less stable as a result, which is the first reason multinational companies must focus anew on geopolitical risk.
Increase in economic sanctions.
The second reason companies must improve their ability to manage geopolitical risk is the proliferation of economic sanctions as an instrument of foreign policy—an emphasis that has increased the ties between global commerce and geopolitics. The United States is, and will remain for some time, a sanctions superpower, and the European Union also wields considerable sanctions power. When the EU joined the United States in imposing sanctions on Iran, many European companies were disabled from trading with that country. The United States and the EU have, with their G7 colleagues, imposed heavy commercial sanctions on Russia, constraining trade there. The reach of U.S. sanctions is particularly powerful, as non-U.S. companies worry that their ability to trade in the United States may suffer if they sustain trade relations with countries or entities sanctioned by Washington. Companies have become used to consulting officials in Washington and Brussels, and in other European capitals to alert them to any unintended consequences of sanctions policies. Such consultations will be a persistent feature of international commerce for the foreseeable future.
Good businesses are smart about understanding the sanctions environment and how quickly it may evolve. They also know how to conduct business as usual when bilateral relations decline but foreign policy pressure stops short of legal sanctions. At the height of the tension with Moscow over Ukraine, for example, Canada’s government tried to persuade its businesses to boycott an economic forum in St. Petersburg. The CEO of the mining multinational Kinross Gold resisted that pressure, arguing that having operated in Russia for 20 years, it had an obligation to shareholders and its Russian employees to attend. The French oil and gas giant TOTAL persisted with investment in Myanmar in the early 2000s despite that country’s pariah status, also helping to keep the lights on in neighboring Thailand. International success depends on business leaders’ having the foreign policy acumen to distinguish between what they can and can’t do in a sanctions environment or tough diplomatic climate.
Increase in south-south trade.
The thickening flows of commerce among emerging nations without the West as intermediary, and the volatility of domestic politics in high-growth markets, is the third reason multinationals must become more adept at corporate foreign policy. Businesses in the developing world are finding opportunities in new markets and discovering new rivals. These relationships require a sophisticated understanding by multinationals. A U.S. company investing in Ghana, for instance, needs to understand not just America’s foreign policy toward Ghana and Ghana’s internal politics but also Chinese policy toward Ghana, given Beijing’s commercial clout there. Investing in Myanmar requires an understanding of its complex internal politics but also an appreciation of its relations with China, India, and the other ASEAN states, all of whom have important interests in the country.
The uncertainty of domestic politics in high-growth markets poses specific geopolitical challenges. Sanctions may be lifted against Iran, but how many companies would be confident investing there unless they understood the relations between all the domestic actors and the links between some companies and the government and the security apparatus? Geopolitical due diligence is vital before even contemplating first steps.
What Is Corporate Foreign Policy?
To navigate the geopolitical complexities of the modern world, companies have to, in effect, “privatize” foreign policy—that is, they must internalize many of the elements traditionally employed in statecraft. For nation states, a foreign policy requires that a country define its interests, collect and analyze external intelligence, find regional and local allies, and cultivate an environment conducive to its success. A country must be mindful of the cultural conditions in which it operates, adapting its style of engagement as necessary while remaining true to its moral principles. Multinational companies must do all these things and more.
Companies today take direct control of their international image and reputation. Few, if any, wish to be seen principally as the commercial arm of a particular nation, as was the East India Company while Britain held imperial sway from the 17th to the late 19th centuries. Nor would companies wish to follow the example of the United Fruit Company, which was complicit with the U.S. government in the 1954 coup in Guatemala. That experience left a legacy of distrust of multinationals, and companies spent the latter part of the 20th century bending over backward to appear politically neutral.
The reality is that companies today cannot escape politics—or pretend to be neutral.
Indeed, since at least the mid-1980s, companies have sought to show that they were doing good in society and have worked hard to present themselves as distinctly apolitical. They have adopted a range of strategies in this effort, including CSR, brand and reputational risk management, and stakeholder management, along with defensive and public relations actions to address concerns of NGOs or even co-opt them. Yet this toolbox of corporate external activities has done little to help a company capture opportunity or protect operations and investments in the face of a coup, state intervention, the actions of local oligarchs, a change in the political fortunes of a key local partner, or a radical shift in public sentiment toward the company.
The reality in the 21st century is that companies cannot escape politics, nor can they consistently pretend to be politically neutral. The answer is to embrace the need to engage politically and diplomatically. Today’s corporate foreign policy has two components: geopolitical due diligence and corporate diplomacy.
New Principles of Geopolitical Due Diligence
Just as companies conduct regulatory, legal, financial, and other due diligence, they must also conduct geopolitical due diligence. To do this, they have traditionally relied on country risk reports, but in an age of transnational and local threats, geopolitical due diligence needs to occur not just at the country level but at other levels and in other spheres as well. Companies must:
Assess transnational risk.
Broad, regional risks may pose a greater threat than country risks, as the Norwegian oil company Statoil learned in January 2013. A gas facility in Algeria that it ran, along with BP and the Algerian state oil company Sonatrach, suffered a terrorist attack that led to the death of 40 people from 10 nations. Following a full investigation by a former Norwegian head of intelligence, Statoil realized that its corporate safety approach did not account for geopolitical threats to security—and that such threats could not be understood solely on a country-by-country basis. The terrorist attack, attributed to al Qaeda, was conceived in Mali, launched from southwest Libya, and carried out in Algeria. Only a rigorous assessment of transnational and regional threats might have anticipated this risk.
Effective geopolitical due diligence requires that companies develop an understanding of both country and transnational risk and then assess both under a broader geopolitical overlay. Statoil now tests its country risk, transnational threats, and broader geopolitical trends analysis at a high management level, separately from formal capital expenditure planning exercises. It engages a very sophisticated team of internal analysts to assess geopolitical risk on a continual basis and has international affairs experts brief the board.
Pay attention to regional political trends.
Due diligence at this level isn’t just about risk assessment—it’s also about sensitivity to regional political developments. International companies that are seen to be supportive of well-conceived regional initiatives can build a geopolitical support base that positions them to capture future value. For example, as Mexico, Colombia, Peru, and Chile place greater emphasis on the integration of their countries through the creation of the Pacific Alliance (PA) trading bloc, private sector firms that support the goals of the alliance may do correspondingly well there. Although the Brazilian government views the PA as an unwelcome rival to the Mercosur trading bloc, Brazilian companies have taken a more positive view. The large Brazilian financial institution BTG Pactual, for instance, opened offices in all four countries once the Pacific Alliance was established.
Assess local in-country risk.
States that are perceived to be generally unstable may still have large sections that are conducive to investment. For example, oil and gas firms have invested in the north of Iraq in the area administered by the Kurdish Regional Government because they are confident that the relative security there will permit continuous operations. An international shipping company renewing its political risk insurance for the Port of Surabaya, in a stable region of Indonesia, should not be moved by the incidence of terrorist activity in Bali. The Mexican state of Sinaloa has murder rates similar to those in El Salvador, the homicide capital of the world in 2015, while murder rates in the state of Chiapas are no higher than those in Hawaii. In Africa, too, threats are often local: Kano and Baga, in Nigeria, are extremely dangerous, Lagos dramatically less so.
Decisions about doing business in one part of a troubled country aren’t simple or straightforward, however. Several years ago the Indian firm Reliance sold its interest in Kurdish Iraq to Chevron, wishing to position itself to take advantage of the potentially larger opportunities emerging in southern Iraq from which it might have been barred because of operations in the north. Companies from countries including Korea, the U.S., and Austria took different approaches: Some judged that they could trade with both southern Iraq and the north; others decided to bet only on the north. Regardless of the strategic decision, each company had to have in mind a coherent foreign policy approach toward the various Iraqi entities with which it was engaged. Neutrality, more often than not, would have meant forgoing all opportunities there.
Don’t neglect home and near-abroad risk.
While it’s natural to place the most attention on places a company might least understand, the greatest geopolitical and commercial risks often occur close to home. For example, the referendum on British membership in the EU had large ramifications for UK businesses, so many began actively to campaign to remain in the Union in the spring of 2016 in advance of the vote, calculating that silence on this “political” issue was not in the best interests of their workers or shareholders.
It is not unusual for companies to overlook political and economic developments close to home that they would successfully perceive further afield. Vale, the Brazilian mining company, has generally organized itself well in its investments in Mozambique, making an enormous effort to develop a refined understanding of that country. On the other hand, it experienced striking difficulties in neighboring Argentina, a country one would expect it to understand well. In 2011, it made a major investment in the western province of Mendoza, but when exchange rate controls and exceptionally high inflation radically increased costs at the Rio Colorado mine, it became commercially unviable. In April 2013, after a meeting between the presidents of Brazil and Argentina, an agreement was reached for Vale to exit Argentina. Abandoning the project cost Vale several billion dollars—a blow that could have been avoided had it taken a more prudential approach to investing in its neighbor.
New Principles of Corporate Diplomacy
Good geopolitical due diligence includes careful assessment of the local, regional, and international forces at play before, during, and after any investment. The role of corporate diplomacy is twofold: to enhance a company’s general ability to operate internationally and to ensure its success in each particular country with which it is engaged. The general international reputation of a company can be affected by its success or failure in any given country, and likewise a company’s ability effectively to enter newly attractive markets or gracefully exit from suddenly unappealing ones depends on its broader reputation.
In the pursuit of those goals, companies can neither comport themselves like NGOs—beating the drum of a single moral issue and advocating resolution of that issue above all other priorities—nor act as substitutes for governments and attempt to provide local populations with all the public goods they need. Rather, they must cultivate wide and deep relations with both government and society. Wherever they wish to operate, they must identify the various stakeholders, understand which groups may be supportive of company goals and which are likely to protest or oppose them, and develop strategies to engage each constituency effectively.
Four key principles underpin an effective corporate diplomacy strategy:
Develop your own foreign policy stance.
The first principle of corporate diplomacy is that companies must develop their own approach to foreign governments, rather than manipulate or be manipulated by the policies of their home country. Companies that align too much with their home governments often encounter problems.
To be sure, home-nation muscle can have its advantages. The Italian firm Trevi, for example, won a contract in 2016 to repair the heavily damaged Mosul dam in Iraq—just months after Italian Prime Minister Matteo Renzi announced the deployment of 450 troops to defend the dam against ISIL. The UK’s “prosperity agenda” calls on foreign embassies and high commissions abroad to support the aims of British companies internationally. Japan supports its companies economically when they seek business opportunities outside the domestic market.
All that said, companies that align themselves too much with their home government often encounter problems. It is not clear that Monsanto gained hugely when the U.S. government lobbied intensely in its behalf to encourage European consumers to be more accepting of genetically modified foods. Sovereign wealth funds have for almost a decade been trying to convince governments and publics abroad that they can take decisions independently of their home government’s foreign policy concerns of the day. Often, big businesses are better off when they develop a character of their own while crafting a foreign policy approach. In entering the U.S. market, China’s Huawei telecommunications firm experienced difficulties at the federal level because of its founder Ren Zhengfei’s links to the People’s Liberation Army (PLA). The United States was concerned that Huawei’s telecom systems could be used to relay data to the Chinese security apparatus. In response, Huawei shifted its focus to the state level. Having been shut out of Tier 1 carriers in the United States, Huawei has succeeded in gaining contracts with smaller carriers, such as SpeedConnect, that have operations in rural areas across the country. It has gone to great lengths to demonstrate its independence from the Chinese government. In a rare interview, in which he acknowledged the perceptions of his company as a front for the PLA, Ren noted that the company’s goal was “to make people perceive Huawei as a European company”—a pretty clear, if eccentric, endorsement of the idea that companies sometimes need to detach themselves from their home country’s foreign policy.
Where possible, develop a transnational character.
The larger a multinational company becomes, the more important it is to develop a transnational character. That’s because when a company or an investor group is seen as having a clear national origin, it risks bearing the brunt of a political dispute. For example, in 2008 the French supermarket chain Carrefour was boycotted in China in retaliation for protests in Paris by pro-Tibet demonstrators. Business suffered until Carrefour, with help from the Chinese government, made a strong case for its international credentials, pointing out that most of its employees in China were Chinese. Today the company is seen not as French but as a transnational globalized player in the retail market.
Deracination comes with two major caveats. The first is that declaring publicly what nationality you are not can be effective in certain situations. Japanese companies have pushed into Africa and Latin America in part by distinguishing themselves from Chinese companies, which have gained a reputation for exploitation in many areas of those continents.
Second, companies should not become so stateless that they feel no obligation to pay taxes anywhere. The failure to pay a decent tax on earnings can itself denote a failure of good foreign policy practice: It can damage a company’s reputation and lead to strong government action—as evidenced by the recent legislative backlash against U.S.-based companies seeking corporate inversions.
Diversify your political relationships.
Companies must engage all actors rather than attempt to mitigate geopolitical risk just through good government contacts (on the one hand) and good social practices (on the other). It is the dynamic relationship between the government, the business elite or oligarch class, and civil society that needs to be appreciated. In high-growth markets where domestic politics are particularly volatile, the internal balance of power between key actors in the economic and political spheres must be continually monitored. Companies need to be alert to fast-paced change in these relationships and be ready to adapt.
The Spanish oil company Repsol, operating in Argentina as YPF, for a time took comfort in the fact that a senior businessperson close to then-President Nestor Kirchner owned a large share of the operation and was on its board. When Kirchner’s wife, Cristina Kirchner, succeeded him as president, she nationalized YPF, and Repsol’s principal contact was powerless to prevent it. While Repsol could have done little differently to prevent a nationalization—which probably hurt Argentina more than the oil company—the experience serves as a cautionary tale that cultivating contacts so closely associated with a particular regime or stakeholder creates a single point of vulnerability and does little to mitigate geopolitical risk. The best political risk insurance remains a wide and deep set of relationships that strengthens the company’s implicit political license to operate effectively.
Don’t sabotage yourself.
Political risk is not just something that happens to corporate bystanders. It can also be caused by inept company action, such as taking long-standing partners for granted or acting to advance shareholder value without regard to local circumstances. Companies need a genuine understanding of the political and foreign policy interests of the countries in which they invest so that they can be fleet-footed in responding to political change.
In October 2015, MTN, the South African–based cellphone provider, was fined $5.2 billion in Nigeria for failing to cut off service to 5 million unverified subscribers who had not provided their addresses when buying SIM cards. The Nigerian government had passed legislation requiring registration as a security measure to help prevent insurgent groups such as Boko Haram from using untraceable mobile phones. A casual observer of Nigerian politics—let alone a major investor in the country—would be expected to recognize that the battle against Boko Haram was a top national priority. In addition, MTN should have been attuned to the rivalry that exists between its home country and Nigeria—the two largest economies on the continent—and had the diplomatic intelligence to act sensitively with regard to Nigerian authorities.
Mining giant Anglo American’s misadventure in Chile in 2012 is another example. Codelco, a state-owned mining company, argued that its attempts to exercise its option to buy a stake in the national assets were ignored by Anglo, which instead began negotiations to sell 24.5% of the operation to Japan’s Mitsubishi for $5.4 billion. Anglo was adamant that it was within its rights to arrange a better deal for its shareholders and accused Codelco of using bullying tactics to prevent the sale. A standoff followed that became extremely costly to both sides. It was resolved only when Anglo agreed to sell a 30% stake in its mining assets to Codelco at a discount to market price, thus damaging Anglo’s overall position in Chile. While Anglo could properly argue that it was acting in its shareholders’ fiduciary interests, and while the ultimate agreement saved face on all sides, Anglo should have realized that it was unlikely to win such a dispute in a foreign market against a state firm and taken action more quickly to end the standoff.
At bottom, geopolitical volatility is no different from other forms of volatility. As long as a company’s geopolitical assessment processes are comprehensive and its corporate foreign policy shrewd, business leaders should be able to navigate these challenging times. In judging the quality of a company, investors will continue to look at traditional indicators of commercial attainment. Increasingly, however, they will mark companies also on their foreign policy aptitude and their corresponding business resilience in the face of geopolitical shock.
- John Chipman is the director-general and chief executive of the International Institute for Strategic Studies. He serves on the board of the Abraaj Group, a global growth-markets private equity firm based in Dubai, and as special adviser to the chairman of Reliance Industries, based in Mumbai. A version of this article appeared in the September 2016 issue (pp.36–43) of Harvard Business Review.