Geopolitical volatility: How corporate diplomacy can help MNCs

Three years ago Russia invaded Crimea; last year Brexit changed the relationship between European Union and the UK; recently China took measures to assert claims in East and South China seas, and the African politics is always mercurial--the list goes on.

Geopolitics is never out of the world business scenario and corporate dictionary. As countries across the globe grow more intolerant towards violent confrontations, especially with reference to outrage and controversies sparked by the new-age media, organisations may now have to develop sharper scrutiny and vigilance to assess risks associated with running of their businesses.

In this fragmented world of beliefs and non-beliefs, there are no fixed rules, and status quo will be challenged in this new reality even more than before. The most successful MNCs will be the ones that also hold expertise in international affairs--something that John Chipman, chief executive of the International Institute for Strategic Studies, defines as corporate foreign policy. He states that companies need to effectively 'privatise' their foreign policy to cope with political uncertainties of a region by collecting external intelligence, identifying allies and developing their own relationships with foreign governments. An American company investing in Ghana, for instance, needs to understand not just the U.S. foreign policy involving Ghana or its internal politics, but also the Chinese policy towards Ghana, given Beijing's commercial clout. Investing in Myanmar not only requires an understanding of its complex internal politics, but also its relations with China, India and other ASEAN states holding interests in Myanmar.

Corporate foreign policy, as Chipman explains, has two components-geopolitical due diligence, which involves assessment of local, regional and transnational risks facing a company, and corporate diplomacy, which aims to enhance a company's ability to operate internationally, ensuring success in each country where it is operational. Successful execution of the policy provides fierce force of competitive advantage for multinational businesses in times of increased geopolitical volatility, perhaps more challenging a risk than financial disruptions, cyberattacks or even economic downturns.

I remember clearly that the Kargil war was not only a huge topic for the country emotionally and in terms of military resource drain, but it was also a very sensitive topic for brands and organisations serving either side of the border. I was then heading the human resource function of a highly established Korean consumer durables market leader. The psyche of the employees at the time was deeply vulnerable. They were all overwhelmed with the way defence personnel of our country sacrificed their lives and, therefore, unanimously volunteered to contribute large amount to defence funds. The leadership agreed and the organisation contributed a huge amount to the Prime Minister's Fund for the purpose. This was soon followed by a call from a journalist who wanted to interview then CEO of my company. But the CEO wanted to avoid it as he was apprehensive that it would put the company and the brand in some kind of geopolitical jeopardy. I had to oblige and I did. Later, I was asked, as our company stood with India on the cause, did it also contribute to the neighbouring country that also happens to be a huge market in Asia and whether our contributions signify or underline the company's political stance?

This is a challenging reality for most of the companies present in both countries, which are in conflict with each other. And the truth is, companies today cannot escape politics or stay neutral. The solution is the willingness to engage politically, even if it means diplomatically.

Effective geopolitical due diligence requires companies to develop an understanding of both countries and associated transnational risks. Again, due diligence must be sensitive to regional political developments as they remain the prime objective. International companies supportive of well-conceived regional initiatives can build a geopolitical support base that positions them well to capture future value. However, decisions about doing business in one part of a troubled country or subcontinent are not simple or straightforward as the international reputation of a company is at stake.

While contributing to corporate social responsibility and humanitarian causes creates a lot of goodwill, it can also put a company in a tight spot, resulting in conflicts, public anger or unrest and leading to loss of confidence as far as stakeholders, including employees and customers, are concerned. So, even beating the drum of a single moral issue or advocating a cause may not always substitute the roles of state and regional governments, helping companies engage meaningfully with a constituency. Of course, the idea is to grow closer emotionally with communities at large. Companies today take direct control of their international image and reputation, and must remain mindful of cultural conditions in which they operate, adapting its style of engagement, while remaining true to its moral principles unless they would like a radically different or rather negative public sentiment flowing towards them.

While designing an effective corporate diplomacy strategy, companies must develop in the most ethical way their own approach or stance to foreign governments, rather than manipulate or be manipulated by the policies of their home country. Companies that align too much with their home governments often encounter problems. MNCs will also have to take a call on whether they want to align with their respective countries on geopolitical issues and whether it will be at the cost of other countries as it can have repercussions.

The larger the MNC, the larger its risks of being seen as having a clear national origin, placing it closer to a political dispute. For example, in 2008, the French supermarket chain Carrefour was boycotted in China in retaliation for protests in Paris by pro-Tibet demonstrators. Business suffered until Carrefour pointed out that most of its employees in China were Chinese (later, the company, with help from the Chinese government, made a strong case for its international credentials). Even though a number of industries are doing well in India, Chinese brands are still not respected here due to historical reasons and also for the mistrust that Indians have for the Chinese.

Companies, therefore, need to develop a transnational character. They must diversify political relationships and engage with all participants, rather than attempting to mitigate geopolitical risks through good government contacts or good social practices. It is the dynamic relationship and balance between the governments, the business elite or the oligarchs and the civil society that must be continuously monitored and nurtured.
 
Political risk is not just something that happens to corporate bystanders. It can also be caused by inept company action such as taking long-standing partners for granted or advancing shareholder value without regard to local circumstances. Companies need a genuine understanding of political and foreign policy interests of the countries in which they invest, so that they can be nimble-footed in responding to political changes.
 
While the points above seem missionary, there is still no straight way to implement one or all of them. Companies should not become stateless in an attempt to evade taxes. The failure to pay a decent tax on earnings indicates a failure of good foreign policy practice and can damage a company's reputation and lead to strong government action.

Geopolitical volatility is no different from other forms of volatility. As long as a company's geopolitical assessment processes are comprehensive and its corporate foreign policy perceptive, business leaders will be able to navigate all challenging times. In judging the quality of a company, investors will continue to look at traditional indicators of commercial attainment. Increasingly, they will also mark companies on their foreign policy aptitude and corresponding business resilience in the face of geopolitical shocks and vulnerabilities.

(The writer is a management thinker and philosopher, a mentor and a strategy consultant, an academician and a veteran in consumer durables and retail. He was formerly associated with LG Electronics as its COO and Director. He is also a member on boards of banks and a few other business houses across various industry verticals and provides them consultation on plans and policies. He is a PhD in organisational behaviour from IIT-Kharagpur. He can be reached at yasho.v.verma@gmail.com)