Week 1: CH 1 + CH 2 + article Rice & Zegart
Article: Managing 21st century political risk (Rice & Zegart)
The challenge of political risk
- Political threats today are more diverse, from non-governmental
actors
- The speed and global reach of political events have increased
Three key trends are contributing to political risk
- The end of the cold war: global landscape has become more
fragmented, with new risks emerging from a variety of political
actors, not just governments
- Supply chain vulnerabilities: globalized supply chains, though
efficient, expose companies to disruptions from political events in
distant regions
- Technology: social media and online activism means that
individuals can influence public opinion and create political risks for
businesses (e.g. viral video)
Types of political risks
- Geopolitical risks: interstate conflicts, economic sanctions, and
multilateral interventions
- Internal conflicts: social unrest, civil wars, and nationalism
- Changes in laws or regulations: impact business operations
through new taxes, expropriations, or environmental regulations
- Corruption: discriminatory taxation and systemic bribery
- Social activism: protests or social movements amplified through
technology
- Cyberthreats: espionage and destruction of intellectual property
Political risk framework for companies
To manage political risk effectively, companies should focus on 4
competencies:
1. Understanding political risk: assess organization’s risk appetite
a. Companies vary in tolerance for political risk
b. Ensure a shared understanding of political risk across the
organization, from executives to operational staff
2. Analyzing political risks:
a. Gather good, timely info from reliable sources
b. Ensure rigorous analysis by challenging assumptions and
considering different scenarios
c. Integrate political risk analysis into decision-making processes
to be proactive instead of reactive
3. Mitigating political risks:
a. Reduce exposure by diversifying assets and creating
contingency plans
b. Collaborate with others in industry to share risk assessments
and mitigation strategies
c. Set up internal teams that can respond quick to emerging
political threats
1
, 4. Responding to crises:
a. When crisis occurs, it’s important to have clear response
protocols and leadership: assessing the situation, activating a
response team, managing communication effectively to
maintain credibility and minimalize harm
b. Capitalize on near-misses; learn from situations that almost
led to crisis but we avoided by luck
2
, Case studies
- Royal Caribbean’s crisis management in Haiti: docking near a
disaster zone
o Leveraging its long-standing political risk management
practices (e.g. local community engagement and government
relationships) -> successfully mitigated reputational risk
- SeaWorld and Blackfish: documentary triggered backlash against
SeaWorld
o Demonstration of major political risk for businesses by social
activism and public opinion
Conclusion
Effective political risk management requires companies to take risks
seriously, approach them systematically, and ensure strong leadership
from the top
While it is impossible to predict every political event, organizations that
cultivate political risk management capabilities are better equipped to
handle crises and mitigate potential damage.
Questions
- Based on this article, what types of risks/challenges in the external
environment are forcing organizations to adapt and change? Can
you think of current real-life examples of these types of risks for
organizations?
- Do the authors take an open system view of organization or a closed
system view?
- The authors provide some suggestions on how these risks can be
mitigated. Do you think these suggestions can be readily applied
across different types of organizations? Why or why not?
3
Article: Managing 21st century political risk (Rice & Zegart)
The challenge of political risk
- Political threats today are more diverse, from non-governmental
actors
- The speed and global reach of political events have increased
Three key trends are contributing to political risk
- The end of the cold war: global landscape has become more
fragmented, with new risks emerging from a variety of political
actors, not just governments
- Supply chain vulnerabilities: globalized supply chains, though
efficient, expose companies to disruptions from political events in
distant regions
- Technology: social media and online activism means that
individuals can influence public opinion and create political risks for
businesses (e.g. viral video)
Types of political risks
- Geopolitical risks: interstate conflicts, economic sanctions, and
multilateral interventions
- Internal conflicts: social unrest, civil wars, and nationalism
- Changes in laws or regulations: impact business operations
through new taxes, expropriations, or environmental regulations
- Corruption: discriminatory taxation and systemic bribery
- Social activism: protests or social movements amplified through
technology
- Cyberthreats: espionage and destruction of intellectual property
Political risk framework for companies
To manage political risk effectively, companies should focus on 4
competencies:
1. Understanding political risk: assess organization’s risk appetite
a. Companies vary in tolerance for political risk
b. Ensure a shared understanding of political risk across the
organization, from executives to operational staff
2. Analyzing political risks:
a. Gather good, timely info from reliable sources
b. Ensure rigorous analysis by challenging assumptions and
considering different scenarios
c. Integrate political risk analysis into decision-making processes
to be proactive instead of reactive
3. Mitigating political risks:
a. Reduce exposure by diversifying assets and creating
contingency plans
b. Collaborate with others in industry to share risk assessments
and mitigation strategies
c. Set up internal teams that can respond quick to emerging
political threats
1
, 4. Responding to crises:
a. When crisis occurs, it’s important to have clear response
protocols and leadership: assessing the situation, activating a
response team, managing communication effectively to
maintain credibility and minimalize harm
b. Capitalize on near-misses; learn from situations that almost
led to crisis but we avoided by luck
2
, Case studies
- Royal Caribbean’s crisis management in Haiti: docking near a
disaster zone
o Leveraging its long-standing political risk management
practices (e.g. local community engagement and government
relationships) -> successfully mitigated reputational risk
- SeaWorld and Blackfish: documentary triggered backlash against
SeaWorld
o Demonstration of major political risk for businesses by social
activism and public opinion
Conclusion
Effective political risk management requires companies to take risks
seriously, approach them systematically, and ensure strong leadership
from the top
While it is impossible to predict every political event, organizations that
cultivate political risk management capabilities are better equipped to
handle crises and mitigate potential damage.
Questions
- Based on this article, what types of risks/challenges in the external
environment are forcing organizations to adapt and change? Can
you think of current real-life examples of these types of risks for
organizations?
- Do the authors take an open system view of organization or a closed
system view?
- The authors provide some suggestions on how these risks can be
mitigated. Do you think these suggestions can be readily applied
across different types of organizations? Why or why not?
3
