A Framework for Managing Political Risk

Political risks were once easy to understand. Within an energy context, two key risks were dictators seizing or gaining political power and nationalising company assets (Chavez nationalising $30bn worth of oil assets in 2007) or regressive government policy designed to appease an extremist element and aimed at specific technologies (Amber Rudd closing ROCs to UK onshore wind in 2015).

However, political risk has now grown to include other, non-governmental actors who have an increased influence on the energy-scape. Dictators appropriating power are not as plentiful as they used to be! These ‘new’ risks include terrorist attacks, UN sanctions, localism, social media and fake news to name a few. Events which happen on other continents have an immediate and direct impact on other countries at a speed which is sometimes dizzying – the war in Syria and the ongoing refugee crisis impacting tourism and security, the 2017 Wannacry malware cyberattack originated from Korea and Russian hacking events which have been attributed to the success of certain political campaigns (Trump and Brexit).

Although individual events are low in terms of probability, todays energy companies are global in their reach – be it traditional energy businesses such as BP and Shell or renewable energy companies such as Mainstream Renewable Power. Therefore, the greatest impact is unlikely to be a single event. It is more likely to be a cumulative effect from several events happening in different locations all adding up to a major impact on the business overall.

Added to this there are three megatrends which are transforming the political risk landscape – politics, supply chains and technology. Global energy companies today operate in the most complex political environment in modern history. Clear, dividing lines as seen during the Cold War are no longer there meaning that todays landscape is filled with terrorist groups, rising states, declining states, rogue states and other non-state actors. Supply chains are unlocking tremendous value for companies. However, longer and leaner supply chains leave business at risk from shocks in faraway locations. Technology is also transforming the political arena through mobile phones, internet and social media. United Airlines lost $255m when David Dao was removed from a flight in Kentucky. Analysts fears were that the Chinese market would react negatively in the belief that Mr Dao was removed due to being Asian.

Recent history has shown how events in other countries can impact significantly what happens globally. Five events which I personally believe has caused a global shock are 9/11, the 2008 financial crisis, Arab Spring, Russia’s re-emergence on the global stage in a confrontational and assertive manner and the rise of protectionism and isolationism we see increasing (e.g. Scottish Independence Referrendum, Brexit etc).

That’s the bad news.

The good news is that managing this risk is still fairly straightforward and uses tools which are already in use. No need to reinvent the wheel. Get the basics right and the ability to manage these risks is high.

One framework for managing risk is to examine the following:

Understand the Risk

–         What is the organisations risk appetite?

–         Is there a shared understanding of risk appetite across the organisation?

–         How can we identify and reduce blind spots?

Analyse the Risks

–         How can we get good information?

–         How can we ensure rigorous analysis?

–         How can we integrate this analysis into decision making?

Mitigate the Risks

–         How can we reduce exposure?

–         Do we have a good team in place to respond?

–         How can we limit damage when it occurs?

Respond

–         Are we capitalising on information form near misses?

–         Are we reacting effectively to crisis?

–         Are we developing mechanisms for continuous learning?

This framework can be adapted to any size of company within a global or national landscape. The way of integrating it into a business is largely dependant on the business and how high up the agenda political risk is.

Smaller companies may use consultants such as me for this type of work. Ohers rely on information coming from the media and cascaded via internal communications to keep abreast of potential issues and situations. Larger organisations rely on in-house units.

Many companies hybridise all the above into a solution which fits their operations and risk exposure (using a consultant to set up the system and deliver monthly briefings supported by in-house comms and a single point of contact in the company for example).

Although none of us has a working crystal ball which can predict the future, managing political risk doesn’t have to be pure guess work. You don’t need to know where the event will come from in order to be prepared for it. Just as the military and police are trained to manage whatever is thrown at them, so businesses can learn to adapt and manage political risk. Businesses which do it well appear to take this element of risk very seriously, they have frameworks to manage it and leadership in the issue comes from the top.

By | 2018-08-27T11:25:49+00:00 August 27th, 2018|Uncategorised|0 Comments

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