Political risk in the age of Brexit and Trump: how to tackle it?

Shortly before Christmas eve last year, the shareholders of Lockheed Martin were oblivious to an avalanche that was about to hit them, decreasing their their stock price to the tune of 4 billion USD – all in the form of 140 characters.



When President-elect Donald Trump tweeted on 12 December 2016, 2% of the company’s market capitalization was shaved off within hours.


Though this wasn’t the first time the President-elect named and shamed companies, the concept of political risk just got a whole new meaning.


But not for long. As the weeks passed by, this turned out to be a blip rather than a freefall, and the stock has shown a steady upward trend in months since.



So how should companies prepare to address political risk? A roundtable, organized by the Public Affairs Council (PAC) and Ellwood Atfield in London on 12 Sept 2017, set out to tackle this question.


Risk, while being a potential source of new business opportunities, is not limited to a politician saying (or tweeting) something affecting a company or sector. Business crises may be caused by major social or political shifts, such as when an increasing number on the political left and right develop anti-corporate sentiments.

Political risk appears when consumers distrust an industry.

When this happens they tend to exert increasing pressure to regulate that sector more stringently. According to PAC President Doug Pinkham, “The act of regulating is an act of distrust”. Citing the Pulse Survey, Doug stated that there is a clear correlation between trust and the desire to rein in a sector by regulating it further.


How a company reacts to strategic threats greatly depends on on its “risk appetite”.


It is therefore important to be clear on the extent to which an organization is willing to experiment or be daring in its public affairs strategy.


One thing is for sure: there is an enormous difference between blind risk-taking and a well thought-out, calculated step in full knowledge of the odds.


When a regulator, such as the European Commission or the British government decides to rewrite the rules, it seems far more effective to be supportive and suggest constructive changes, rather than oppose the new rules from the outset.



This is somewhat akin to the winter sport of curling: whilst the stone’s progress may seem to be inexorable, your judicious and energetic sweeping (ie. public affairs strategy) can still alter its path and destination.


The difficult question is how to do it.


If you operate in a B2C market, you may be able to get your customers to speak up for you. Uber and tech companies tend to apply this technique when the stakes are high and customers are willing to be politically engaged — with varying degree of success.


Others do scenario planning: a sophisticated exercise measuring the odds and impact of a political event, regulatory change or change in public sentiment, and evaluating the resulting government affairs strategy they should put in place. For instance, what does a “hard Brexit”, a “soft Brexit”, or anything in between mean for your customs, trade, and other business?


When discussing Brexit, access to talent becomes a critical political risk, especially in the leisure and hospitality sector: these are highly dependent on EU immigration.


According to John Dickie, head of London First, some 50-60% of businesses they interviewed were delaying investments or strategic decision because of the uncertainty Brexit has triggered.

Evaluating political risk is about both political forecasting and a legal assessment, with the horizontal involvement of multiple departments of a company to conduct the impact assessment.


A related challenge is assessing the real level of risk: shouldn’t you rather be worrying about your competitors, market changes, retail pricing, employees, or any other business risk?


If we expand the scope from Europe to various Central Asian countries and beyond, we should keep in mind the risks related to corruption, state capture by powerful political parties or interests, political or military coups, compliance issues, and the list goes on.


And what about the historical perspective? Have the past 20 years of relatively business-friendly trends of free trade and globalization been an outlier or the new way?

Is anti-business sentiment really increasing globally?

Maybe the answer is that public affairs needs to be part of the enterprise risk management strategy. Political risk may not be so different from disruptions in the supply chains or other unexpected or unlikely-but-possible events impacting the business. And if that’s the case, the way it’s evaluated and assessed should be by applying the same mathematical, quantifiable formulas.


Finally, the definition of political risk may also include the reputational risk linked to being the dominant player or a well-known consumer brand.


This exposes your company to greater public scrutiny and possibility of attacks. Just think of how Apple was criticised for working conditions in the outsourced Foxconn factories, or Greenpeace used Lego’s partnership with Shell to attack the latter’s activity in the Arctic.


What is there to do about political risk, then?


In short, monitoring, scenario planning, quantification, applying enterprise risk management tools, and forecasting.


All the while keeping in mind that risk may not be such a bad thing after all…it may create great business opportunities, too.


Special thanks to Nicola Bates and the E&A team, Doug Pinkham, John Dickie, Chloe MacEwans, and Steve Cuthbert for the event and discussion which this article was partly based upon.


Posted in EU Affairs

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Copyright © Andras Baneth. All Rights Reserved.