Companies must monitor risks amid rising geopolitical threats

With geopolitical threats on the rise, companies need to monitor risk and be prepared to act to minimise potential impacts on their interests. 

Lowy Institute executive director Dr Michael Fullilove AM says there’s more demand for the international policy think tank’s work than ever before. “There has never been a greater interest from directors and companies in geopolitical risk. You just feel it all the time, the demand from our members is much stronger than it’s ever been,” he says. “Why? Obviously, because geopolitical risk is increasing.”

Fullilove, who has been involved with the Lowy Institute since it was founded 21 years ago, points to a slowing in the interconnectedness of economies and frictionless travel, a trend towards more authoritarianism, an increase in state-on- state conflicts, and the fact that geopolitical risk is spreading from the margins of the international economy to the centre.

“Previously, you’d think about geopolitical risk in Africa or parts of Asia, but we’re talking a major land war in Europe and instability in the US and in the UK,” he says. “It’s moving, migrating towards the centre of the international economy and the countries that Australia has historically had a great deal to do with. A stable international order is a bit like oxygen. You can’t survive without it, but you don’t really notice it until it disappears.”

All this means that geopolitics appears more frequently on the agendas of Australian company board meetings, added to the other risks directors must take account of. The topic is of interest to companies with significant offshore operations, but also to those that are domestically-focused, as the effects of geopolitical risks can spill over into the Australian economy.

Have a Plan B

Geopolitical risk is a key focus for the board of packaging giant Amcor. It operates in 212 sites in 40 different countries, some of which chair Graeme Liebelt FAICDLife describes as fairly high-risk. Local management in each country provides up-to-date information and on-the-ground intelligence to the board, supplemented by the international press and occasional briefings from specialist advisers.

Companies operating in risky countries need to ensure they have an appropriate risk-reward balance for the investment, with higher risk ultimately meaning higher reward. “If you choose to invest, pay a lot of attention to what the risk mitigants are,” says Liebelt.

At Amcor, the board likes to have a Plan B. “If it goes wrong, you certainly don’t want it to go wrong to the extent of jeopardising the company,” he says. “You need to spend some time thinking about those risks, how you would react to them, whether your management has the appropriate mitigants in place.”

Amcor has a plant in Kharkiv, in western Ukraine, which it closed a few days before the Russian invasion, moving most of its staff out. Many were then employed at other plants in Europe and some joined the Ukrainian army. The company has also faced political instability in some South American countries in which it operates.

“We’re alert to particular challenges that are happening around the globe,” says Liebelt. “When we’re talking to our management teams at a strategic level once a year, we would talk those things through. But if it becomes obvious that something is looming or might happen, then of course, that conversation gets more urgent.”

Liebelt has little confidence in the ability of boards to predict what’s going to happen. Instead, the Amcor board thinks through possible scenarios and ensures that operations are alert to the potential outcomes and in a position to respond most effectively. “Most times, the world seems to find a way of ploughing through these things, but not always,” he says. “Adaptability is the key.”

Feeling the heat

As head of geopolitical risk at ANZ, it’s Cameron Mitchell’s job to ensure the bank is alert to and managing geopolitical risk. Mitchell is part of the bank’s larger risk function and his role is to keep the senior management abreast of relevant geopolitical issues to the bank, contextualising and prioritising them, and providing insights. He also works to operationalise geopolitical risk.

“That's working very closely with other parts of the risk taxonomy — the country risk team, group security team, credit risk folks, market risk and so on,” he says. “Then trying to work out how those geopolitical themes or trends impact the business and our clients. We mitigate those risks through stress testing, portfolio and exposure reviews, and educating clients.”

Mitchell keeps watch over about 15 geopolitical risks, plotting them on a heat map showing likelihood and impact. Each quarter, he selects key risks to present to the board for directors to be mindful of during the next three months — and explains why. The board also wants to know what the bank is doing about the risks. So, before the heat map is given to directors, Mitchell utilises the other risk functions to assess how the risks can be mitigated. It could be anything from a stress test down to a review of the business continuity plan or some broader de-risking work.

A series of indicators and warnings informs the heat map. When they are triggered, the bank will take a deeper look at the issue. For example, if the risk warning of escalation of tension between NATO and Russia is triggered, ANZ’s European business leads will work out where the bank’s exposures are and where its clients are based. If they’re in countries more susceptible to such escalations then the risk team will work out which sectors are more exposed to threat and how many clients it has in those sectors.

ANZ operates in 33 markets around the world. Rather than listing each on a heat map, it boils the risks down to themes. Mitchell describes terrorism as a perennial threat, where the ANZ focus is on an unprecedented terror attack. “We’re looking at a new use of attack method or we’re looking at a market in which a major terror attack has not occurred before.”

Cold War redux

University of Queensland Chancellor Peter Varghese AO says geopolitical risk is heightened in a way that it hasn’t been recently, at least since the end of the Cold War. “Economic policies are now being adapted to deal with geopolitical objectives in a more comprehensive way than we’ve been used to in the period since WWII,” says Varghese, previously Secretary of the Department of Foreign Affairs and Trade, High Commissioner to India and Malaysia, and Director-General of the Office of National Assessments.