Political risk is the risk of financial, market or personnel losses resulting from political decisions or disruptions. In the past, organizations doing business internationally were significantly concerned about political risk. Top of mind were worst-case scenarios such as government nationalization, trade restrictions, and the imposition of barriers to access resources. Things have changed and organizations of all kind are realizing they must become much more savvy political risk managers in order to thrive.
The most poignant example of domestic political risk so far this week was the announcement by two Western cities to pull their business from the financial institution financing the Dakota Access Pipeline project. This amounts to more than $3 billion in annual cash flow!
Less recent but frequent examples include being specifically called out and criticized by the executive branch, vacillation in the enforceability of government mandates, and uncertainty over future government policies, regulations, trade agreements, and tax codes.
Organizations do not thrive in an environment of uncertainty and so must find ways to cushion themselves from political risk. Risk management principles that are effective for operational risk can be equally applied in the management of political risk.
- Catalog your organization’s strategic objectives, products and services, business processes, infrastructure, and third party relationships. This gives you business context and a baseline of exactly what your organization is doing and who they are doing it with.
- For each of the items catalogued, document what politically-related things could happen that would be adverse to the organization.
- Assess these political risks. How likely is the political risk to occur, how would it manifest, and what would be the worst-case impact to the organization should it happen?
- Examine the complete portfolio of risks to your organization and prioritize actions to be taken to reduce those risks that exceed your organization’s risk appetite.
- For political risks that exceed acceptable levels, actions may include reducing the activity that introduces political risk, creating contingency plans to minimize the impact if the political risk incident arises, proactively adjusting the business plan to hedge the risk, and negotiating with the counterparties that are the source of the political risk.
- Monitor the political risk as the political environment changes. Political risk tends to be volatile, and can be quite sudden to appear. This volatility warrants great diligence to constantly monitor.
Today, political risk can severely damage an organization’s reputation, financial performance, and fulfillment of objectives. It warrants the application of proven risk management tools such as the RSA Archer suite to methodically apply accepted risk management principles to this vexing risk.