Today, companies are facing major global and domestic geopolitical risks and threats. How can companies and their boards prepare for these risks? In October 2024, the Wharton Alumni for Boards community and Nasdaq Center for Board Excellence hosted a panel to discuss these risks and how forward-looking boards can prepare for them. Michael Normyle, Senior Director of Economic Research at Nasdaq, Matthew Bey, Senior Global Analyst at RANE, and Sheila Bangalore, Nasdaq Center for Board Excellence Insights Council member, independent board member, Athena Alliance Board Observer, and Wharton alumna, shared insights, emphasizing the critical need for strategic planning, robust risk management, and innovative thinking to navigate the complex and evolving economic, geopolitical, and supply chain landscapes.
Regardless of geopolitical developments, companies and boards need to be vigilant and adaptable in the face of global and domestic challenges. Risk assessment strategies must be sufficiently robust and agile to adapt to rapid changes in geopolitical conditions. Michael Normyle and Matthew Bey underscored the importance of forward-thinking and preparedness in board governance. This is crucial not only in managing geopolitical risks but also in responding to economic shifts that could arise from policy changes.
Economic Policies and Inflation
As boards prepare to navigate these complexities, they must also consider the economic implications of new policies proposed by political leaders. For instance, proposed economic, tax and trade policies could significantly influence market dynamics. If implemented, these policies could increase inflation and the U.S. budget deficit, at least in the short term. Moreover, the possible introduction of trade tariffs could further complicate the economic landscape, potentially leading to higher consumer prices and necessitating a strategic response from businesses. Perhaps even more challenging than inflation spikes are the Federal Reserve Bank’s responses to inflation, such as the interest rate policy, which will demand a long-term focus and strategy.
Trade Policies, China Trade Issues, and Supply Chain Risks
One of the most significant macro risks is the potential fracturing of global trade into a U.S.-allied bloc versus a China-allied bloc. In certain sectors, this scenario may necessitate a rejiggering of supply chains, prompting some companies to establish parallel supply chain structures with both “China-centric” and “U.S.-centric” suppliers. While smaller companies might be hit the hardest, all companies and their boards should consider the decisions their suppliers will face, such as whether they can cater to both U.S.- and China-based companies or must choose between the two. Companies should consider identifying alternative suppliers in case existing ones are forced to alter their business strategy.
Boards can effectively bolster their understanding of and preparedness for supply chain risks, among other risks, through scenario planning and corporate wargame exercises. Given likely shifts in trade practices and restrictions on the foreseeable horizon, it is prudent for boards to be well-advised, as well as map out potential risks associated with various policy decisions and competitor and supplier behaviors, to proactively address potential disruptions.
Fear and Pessimism in the Boardroom
When evaluating major geopolitical issues, there is a natural tendency to let fear and pessimism from past experiences influence perceptions and expectations, often imagining the worst possible outcomes. For instance, those who have lived through previous fuel crises might view current or potential fuel price increases through the lens of those past events. Today, as we anticipate the impacts of situations in the Middle East and other parts of the world, it is crucial for boards to approach these issues with logic and clear thinking, setting aside emotions and fears of the unknown to truly assess the current realities and their potential impacts.
Some companies have developed “early warning systems” to anticipate geopolitical risks and their repercussions. For companies and their boards seeking guidance, they should start by establishing a solid foundation for decision-making. This includes identifying the greatest risks to the business, understanding the relevance of these specific geopolitical matters to the company, and assessing vulnerability to associated risks. Thinking creatively to forecast unforeseen events is challenging, yet essential. Looking at historical perspective is valuable and implementing formal scenario planning exercises can help boards facilitate their evaluation and decision-making processes.
As a final note, an increasing number of companies are beginning to look specifically at global security and integrating geopolitical risk into their broader risk management strategies. It is advisable for companies to have dedicated teams and monitoring mechanisms in place to regularly review these issues, ensuring that this responsibility does not fall solely on the board.
As global and domestic challenges continue to evolve, the emphasis on robust risk management, strategic foresight, and adaptability remains paramount. Boards must not only prepare for the immediate impacts of economic policies and trade issues but also cultivate a proactive approach to foreseeing and mitigating potential disruptions. It is necessary for boards to engage in innovative thinking and continuous learning to effectively navigate these turbulent times. By integrating these practices, companies may enhance their resilience against unforeseen challenges and secure a competitive edge in a rapidly changing world.
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