IN RE: The Speed of Political Risk

By Harlan Loeb, Executive Vice President, U.S. Issues and Crisis Practice Director

How about this for the velocity of political change? Who is Egypt’s Prime Minister? On Jan. 1, it was Ahmed Nasiz; on Feb. 1, Ahmed Shafiq; March 1, Ahmad Sharif; today, Essam Sharaf. No wonder that in the politically volatile Middle East, global enterprises scramble to find an accurate “GPS system.” At a meeting of Chicago executives Tuesday, GE Chairman and CEO Jeff Immelt maintained that he didn’t believe the Mideast turmoil would “hit global economic growth” as long as it was contained. Embedded in his perhaps prescient caveat on “containment” lies the reputation challenge for global enterprises.

As oil prices quickly surge toward historical highs, many multinationals have been blind-sided by the speedy agility and ability of socially organized protests to force regime changes and, consequently, trigger significant uncertainty in critical business markets. Much of the chattering class has criticized the extent to which the tectonic changes in the Middle East caught the Obama administration flatfooted. While critical political considerations certainly weigh in the balance, the significance for global businesses is a much different one. They now are officially on notice that they are accountable for anticipating and planning for political change, and they must calibrate business decision making accordingly. Global business also must recognize that reputation risk is retroactive—so today’s cozy business relationships with dictatorial and corrupt regimes may forge tomorrow’s reputation crises.

Strategic Imperative

What does this mean? Global companies now are duty bound to stress test their decisional structures to ensure that reputation risk and political risk are more closely aligned than ever. This extends to a variety of franchise concerns including:

• Market Entry: It’s all about your reputation. Let’s say that you’re a company with plans to expand in north Africa. Almost certainly, no matter how you look at it, stakeholders will insist you re-evaluate that decision. For if you hit turbulence there, they will charge you with failing to take enough appropriate precautions.
   
• Business Continuity: Yesterday’s honored agreements may not be honored tomorrow. Just consider that market trading and other market-related activities stopped for four weeks during the upheaval there. You must plan for such business-disruption contingencies, in north Africa and Asia.
  
  
• Global Supply Chain: Yesterday’s prices aren’t tomorrow’s. It’s imperative to assess the risks to your global supply chain, your sourcing and pricing, should any number of global events occur, in the Middle East and elsewhere. How dependable is the supply chain you employ and how dependable will you be for those customers who rely on you?
  
  
• Global nongovernmental organizations, or NGOs: They have more credibility and generate more trust today than practically every other institution, according to the 2011 Edelman Global Trust Barometer. So expect them to impose new standards on companies doing business in north Africa and other volatile areas, especially where human rights are concerned. But don’t forget those areas where similar issues have arisen before and they could resurrect again very easily.
  
  
• Security: You’ve got to protect your people and your physical resources.
  
  
• Strategic intelligence: With the rise of global social networking, a sudden event like the Egyptian uprising can’t come as a shock anymore. It makes qualitative analytics even more important for global companies to invest in and use. Further, it underscores the critical importance of your trusted relationships internationally. Without these, a company can’t make informed business decisions today. And if you can’t make them, you’ll fail. You simply must have a sense of what’s going on in the world where you operate.

Indeed, the Mideast events illuminate how interconnected global citizenship and economics have become. GE Chairman Immelt underlined that by noting his company today generates 60 percent of its revenues outside the U.S., up from 30 percent a decade ago. He also cited Boeing, where 96 percent of its employees are in the U.S. while 80 percent of its orders come from abroad.

Because the political landscape can now change in nanoseconds and spark enormous reputational consequence, our clients must critically and continually evaluate the reputation risk of the company they keep. That’s globalism 2011.

For more information contact: Harlan Loeb: 312-240-2624 harlan.loeb@edelman.com