Economic decoupling, sanctions, and supply chain rewiring are forcing corporations to adapt
Corporate awareness of geopolitical risk is becoming acute. The transition from globalization and convergence to weaponized interdependence puts private corporations in the crosshairs of geopolitical rivalries and national security concerns. Economic sanctions (including export controls and restrictions on cross-border investment) have superseded anti-bribery laws as a focus for crisis management. Corporations are increasingly required to respond to concerns about vulnerabilities posed by trade, and financial and technological interdependence.
Consider Canada’s national security review of Jinteng (Singapore) Mining’s purchase of a Peruvian gold mine from Pan American Silver Corp., US efforts to ban TikTok because of indirect Chinese ownership interests, or economic sanctions imposed in response to Russia’s invasion of Ukraine. Likewise, consider efforts to rewire supply chains and transition to “friend shoring” to reduce geopolitical vulnerabilities.
Modern corporate governance has been premised on harmonizing legal frameworks governing corporations and capital markets, primarily focusing on private wealth maximization. The benefits of expanding international regulatory cooperation and economic interdependence in promoting market-driven capitalism muted ideological debates over governance systems. That ideological hegemony is now being challenged by shifting geoeconomic dynamics and escalating cycles of populism, economic decoupling and distrust.
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In a sense, the shift recalls the early days of corporations, when they were chartered by the state to assist in implementing public policy and producing public goods. This challenges the market-driven paradigms that underlie our current corporate governance standards. How should corporations adapt to this new reality?
As with ESG issues, corporations find themselves in an uncertain and largely reactive mode. However, in contrast to the bitter partisan debates about environmental, social and governance (ESG) issues – whether corporations should be held to account for the negative externalities of their operations and pursue objectives beyond short-term wealth maximization – there is typically broad domestic support for compelling corporations to address perceived threats to global security and rules-based international orders.
Are corporate boards adequately prepared for the role they are expected to play in an era of deglobalization? A recent survey of internal auditors in Europe reported a gap between geopolitical uncertainty as a risk priority and the corporate resources dedicated to addressing it.
How many boards identify geopolitics as a requisite skill set for senior management and their boards? Unlike cybersecurity risk management, corporations have no mandated disclosure requirements for managing geopolitical risk factors. Few currently disclose where oversight responsibilities for geopolitical risk have been assigned within the organization and how they are assessed and managed.
Responding to geopolitical risks is becoming part of the evolving template for seeking judicial remedies. Under corporate law, directors and officers may be held liable for failing to monitor a company's “mission critical” risks. The risks described above meet this threshold. Likewise, they increasingly rise to the level of “materiality” that triggers public disclosure requirements under securities laws. In any event, and as we’ve seen in connection with the ESG movement, companies need to address reputational resilience by clarifying their interactions with geopolitically sensitive issues and markets.
The Supreme Court of Canada has characterized directors’ duties as “to act in the best interests of the corporation, viewed as a good corporate citizen.” Likewise, the UK Companies Act requires that directors regard “the desirability of the company maintaining a reputation for high standards of business conduct.” Such warnings (and the way we think about corporate governance standards) take on new meaning when viewed through the lens of the geostrategic values of home and host governments.
Boards’ risk apertures must widen to include geopolitical risks that could disrupt business continuity and resilience. This perspective should extend beyond the organization to its entire supply chain. Boards must also increasingly address potential insurance market gaps and failures and explore other risk transfer mechanisms.
A recent Eurasia Group/KPMG report argued that multinational corporation CEOs must now play the role of chief geopolitical officer. While boards rely primarily on information from management, it is likely prudent for those with international business operations (or aspirations) to seek input from specialized external advisors to inform decision-making and protect themselves from potential liability.
