Prevent, crisis or respond?
Is the corporate goal to minimize financial impact, to make a political statement or something else? After Russia’s attacks, several oil and gas companies announced corporate actions, announcing their intent to disinvest or abandon assets worth billions. British Petroleum quit a 20% stake in Russia’s Rosneft oil company and quit two of its board seats. BP’s CEO Bernard Looney wrote on Feb 27 that the decisions are “. . .not only the right things to do, they are also in the long-term interests of bp and our shareholders. Yes, there are financial consequences that will show up as material non-cash charges in our next quarterly results.”
In BP’s case the price could reach USD$25 billion.
But had other companies taken earlier steps privately to assess the influence and controls that Vladimir Putin’s government had on governance of Russian gas/oil/pipeline and related companies? Crisis reactions drew headline attention, but what principles guided earlier actions aimed at operations or crisis avoidance? Keep in mind that board actions, or inaction, may need to be examined when public events require disclosures.
Tools and tactics include country-specific or event-driven political risk in surance policies to financial hedging strategies and other tactics to help manage geopolitical shocks.
An emerging role for active boards
Boards and directors who know their history understand the twin roles that risk and opportunity represent. A 2019 study by BlackRock showed that the average financial markets respond modestly to unexpected geopolitical shock. Equities and bond prices represent an immediate reaction but underlying industry or audience change is where long-term success can be built on a shifting platform.
Consider how the COVID-19 pandemic altered the landscape for home delivery business for restaurants globally or delivery services and community networks. Since 2020, many physical restaurants are adopting hybrid models than embraced cook-at-home meal kits, eat-in options, locally grown support for area farmers and other initiatives to diversify revenues.
Separating basic business risk from externalities is a key mission of your board of directors, and so each board should have experience of risk assessment. Over time, corporations evolve, such as Nokia’s shifts from lumber in the 19th century to automotive tires then expansion into telecommunications manufacturing.
Companies regularly adjust strategies to consider and embrace more, or less, uncertainty, opening doors to agility and resilience as they work to mitigate geopolitical risks. Preparations include these four steps:
- Identification: which risk factors are still in effect and which are old or no longer applicable?
- Assessment: what are the early warning signals or edge indicators that could help to predict risks? Are they reviewed in a systematic, repeatable process? What was the key lesson learned from the most recent risk incident?
- Appetite: who decides which risks are worthy of board-level action? Is there a tiered or escalation process as situations change and the impacts on a company or its stakeholders become more severe? What is the appropriate timeframe for evaluating impacts or reaction?
- Management: are response tools such as financial hedging, regulatory compliance, social agenda or internal profitability a balanced set of measurement for identifying the problem? Will they help the board with evaluating solutions or reflecting corporate values?
In extreme cases of introspection, the company’s fundamental role may be called into question. Is it there to earn money, to effect social change or hoping to avoid decisions with ethical implications? The answers from board members might tell you how ready they are to manage risks.