Op-Ed

Risk management: the political effect

The 2020 disruptor may be an apt description of the COVID-19 pandemic. Although noted as a global public health event, COVID-19 is undoubtedly a political risk event that has had a profound effect on industries, people and government, leaving them with two overarching options: pivot or perish.

“Geostrategy in Practice 2020”, released by Ernst & Young, noted: “Political risk — a political event that alters the expected value of a business investment or economic outcome — can emerge from international, country-level or civil society actors. The overall incidence of political risk has increased dramatically in recent years — hitting a post-World War II high in the 2016-2018 period, according to research we conducted in collaboration with the Wharton School’s Professor Witold Henisz. And now, the COVID-19 pandemic and resulting geopolitical tensions and volatile country policy environments are likely to dwarf that previous high. It is crucial for executives to continually scan the landscape to determine what political risks their company faces.”

As we listen with bated breath to weekly updates by the authorities, where they indicate that they are reviewing the risk indicators, while simultaneously balancing public health, there is one glaring reality: the political and governmental actions being taken and the responses by political actors can directly impact a company’s general enterprise risk management (ERM) framework and its ability to strategically plan. However, please note that the integration of political risk into ERM gives even the most experienced risk management practitioner a reason to pause. Political risks are considered highly subjective and its categorization does not have a linear pattern to follow.

Lauren Phillips wrote in her opinion piece, titled “Assessing governance: how can political risk analysis help?”: “There is some possibility, however, that the impacts of political events on the actual outcomes are misinterpreted, particularly by actors with short-term goals.”

Interestingly, until the COVID-19 pandemic, most political and country indices would have depicted The Bahamas as a medium-risk jurisdiction. Time will confirm whether this is still true.

It is against this backdrop that I wish to discuss:

1. Why political risk matters;

2. Labeling political risks; and

3. Who is responsible for political risk management?

Why political risk matters

On a country level, political risk is a major driver of international risk premiums on borrowing rates and directly impacts investor confidence and planning. Simply put, the volatility impacts how much it would cost our government to borrow and how much it would cost the business operator to remain or continue business operations.

In The Bahamas, the political risk for many companies may have been rated medium or low when completing enterprise risk assessments back in Q1 2020. This conclusion may look different now. The truth is, all companies that utilize risk assessment should re-evaluate their positions, especially in the category of country and political risks. If your risk assessments were void of political risk as an indicator for review, now is the time to make the addition.

Labeling political risks

C-suite leaders and risk professionals often struggle to strategically manage political risks as it presents a significant cross-enterprise threat at a micro level and impacts the general population at a macro level. Therefore, it is safe to espouse that there are two general categories – macro and micro political risk. These categories can be further broken down into subsections such as geopolitical risks, country-level risks, regulatory risks, societal risks, etc.

Mapping the effects of political risks is imperative for governments, companies and citizens, so that all parties can move from being reactive to a proactive position, hence being somewhat able to mitigate the impact of political risks.

Who is responsible for political risk management?

Every facet of our country has a role to play in managing political risks. Governments must act decisively and with clarity in an effect to give other stakeholders clear information for planning purposes. Companies must decide if they will have an individual, committee or function be made responsible for political risk management. No matter the approach decided by the company, there must be cross-functionality in reference to the identification of risks, assessing their impacts on the company and having the authority to take action to mitigate. The general public and political actors should consider that their action impacts the local and international perception of their country and could have medium to long-term negative or positive effects. The reality is that it is not national governance, company management and politics as usual.

Conclusion

Notwithstanding the aforementioned, political risks are not always bad, as they can present opportunities based on the agility of the country, companies and people. Governments and companies must capitalize on the momentum around strategic risk management to improve internal and external risk management practices. 

• Derek Smith Jr., a Top 40 Under 40 leader, is the compliance officer at a leading law firm in The Bahamas and former AVP, compliance and money laundering reporting officer (MLRO) at an international private bank. His professional career started at a Big Four accounting firm and has spanned over 15 years including business risk management, compliance, internal audit, external audit and other accounting services. He is also a CAMS member of the Association of Certified Anti-Money Laundering Specialists (ACAMS) and executive member of the Bahamas Association of Compliance Officers.

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