Managing Political Risk: Controlling Loss, Finding Opportunity

Many companies do not actively measure and manage political risk, an observation validated by our 2011 Global Risk Management Study.

In this paper, Accenture argues that political risk can indeed be measured and managed, and proposes a detailed three-stage methodology for integrating political risk into an organization’s existing risk management programs. The ability to manage political risk can operate as a political differentiator for companies on the road to achieving high performance.

Recent developments have provided a stark reminder to organizations that political risks can affect their activities, objectives and profitability.

Crises such as the Eurozone negotiations, the debt ceiling debate in the United States and the Arab Spring protests throughout North Africa and the Middle East took form rapidly and with little advance warning. Threats by the Iranian government to close the Straits of Hormuz have had a direct effect on oil prices. Other types of political risk—including state actions to promote state-owned companies; tapping into the cash flow of companies operating within national borders; and erecting trade barriers—have re-emerged and pose significant problems to many companies.

Yet, while the management of financial, market and other types of risk has become a paramount business consideration since the economic crisis of 2008, Accenture’s 2011 Global Risk Management Study found that most companies do not measure—or manage—political risk. Organizations tend either to accept these risks, or to avoid opportunities altogether when they pose large political risks. The management of political risk, however, can be a competitive differentiator that enables companies to enter and navigate new markets and business environments.

Political actors or political conditions can put business objectives at risk. Political risk can stem from governments but also non-governmental organizations, state-owned enterprises, trade unions and other groups that pursue political objectives.

Political risks are taking new and previously unexpected forms. In advanced economies, these include real and perceived income inequalities, and high levels of sovereign debt. In emerging markets, resource companies have faced contract reviews as commodity prices remain high by historical standards and governments seek a larger piece of a growing revenue pie. State-sponsored competitors from countries such as Russia and China—armed with finance and incentives from their governments—can alter the competitive landscape in many industries.

One of the most challenging forms of political risk is the loss of the social license to operate. Community opposition to projects such as the Keystone gas pipeline in North America can create extensive delays and add significant cost and complexity to already challenging initiatives.

Another increasing risk is cash flow expropriation, sometimes a product of “resource nationalism” in the energy and mining industries.

A recent World Bank study indicated that more than half of all organizations believe that political risk will be the most important constraint on investment in emerging markets. In the same study, however, most of those organizations indicated they have no way of measuring political risk and do not integrate it into their approach to risk management.

Because many companies view political risk as separate from “normal” risk, they either accept losses due to political risk or simply avoid areas where political risk is prevalent. By contrast, however, Accenture believes such risk can both be measured and managed by adopting a three-stage process that is aligned with most company approaches to risk management.

• Stage 1: Identify. In Stage 1, risk managers identify the main political risks by geography. The key question at this stage is: “How can political actors or conditions directly affect our objectives?”

• Stage 2: Measure. In Stage 2, armed with a very specific set of political risk scenarios, risk managers assess and quantify the impact of each scenario on the business.

• Stage 3: Manage. Once risks have been identified and measured, an effective system for active political risk management can be put in place. The first element in managing political risks is to map potential risk management methods against the priority risks.

Peter Beardshaw is executive director, Accenture Risk Management. Based in London, he brings over 17 years of deep experience in delivering target operating models and business process redesign initiatives within multiple risk and capital management areas. His broad experience in international program management and change management, in addition to his business and technical experience across front, middle and back offices helps organizations become high-performance businesses.

Ben Cattaneo is a manager in Accenture Risk Management and works within Accenture’s Cross-Industry and Resources team. Based in London, he possesses over 12 years of experience helping clients assess, quantify and manage political risk, design and implement enterprise risk management programs, and manage acute crises. Cattaneo combines deep risk management expertise with strategy and change management skills to help clients become and remain high performing businesses.

Rafael Gomes is a manager in Accenture Risk Management, and responsible for the Accenture UK Risk client offering for hard-to-quantify risks: political, reputational and sustainability. With over 10 years of international political risk experience, Gomes specializes in helping clients to optimize international asset portfolios and enhance stakeholder relationships by managing political risk more systematically with innovative technologies. He combines cultural understanding with a passion for technical rigor to help clients achieve high performance in challenging environments.