Why is geopolitics knowledge essential for business leaders?

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Geopolitics has an impact on a firm’s reputation, value, and market performance

Those in geopolitics have often overlooked the vital role played by businesses in shaping global affairs, while businesses themselves view geopolitics as a risk to be managed. Can this gap be narrowed, and why is knowledge of geopolitics key for companies and leaders?

From a business perspective, geopolitics is important because corporations feel the heat of social pressure to do good for society. Moreover, doing good for society is international and political because customers, partners, employees, or the media look at the whole supply chain and scrutinise every action the company makes worldwide.

If Nestlé or Mondelez continue to operate in Russia, for example, a backlash is expected in several countries where the two giants operate. If the McDonald’s franchise in Israel offers food to Israeli soldiers and franchises in Kuwait or the United Arab Emirates, donate money to Gaza, that will inevitably raise a question of consistency for McDonald’s headquarters in Chicago. Businesses must understand that corporations are an integral part of the geopolitical battle and must prepare for that.  

Globalisation promised to build truly transnational, multinational, or global corporations—corporations without nationality. However, the trade war initiated by Trump’s presidency and the COVID-19 pandemic has brought back the question of corporations’ nationality and economic sovereignty.

Also read: India's evolving economic power can lead us into a re-globalised world

Consequently, all corporations have a nationality, even if they would like to hide it. Take, for example, TikTok or Shein, pretending to be Singaporean companies. If a company is declared American, Chinese, or Russian, it would suffer or benefit from the political country-of-origin effect, and its managers who originate from another country will have to make do with that effect.

Geopolitics and business risk

Senior managers may effectively address risks and opportunities related to geopolitics. The first and usual option is to buy an insurance policy against geopolitical upheavals. Public and private vendors like DFC, Allianz Trade, or Coface propose insurance options against macroeconomic problems or declared/undeclared wars. The second option is to engage a Chief Political Officer to keep relationships smooth and harmonious with political leaders in countries where the corporation operates.

These are the traditional ways corporations deal with geopolitical problems. However, today, this is insufficient, and some banks and consultancy companies such as Goldman Sachs and Lazard have opened geopolitical units to help private corporations and governments.

Also read: When markets and politics collide, innovation may lose out

Finally, social media poses a particular problem. For example, the latest Zara campaign has been blasted because of its similarities with the situation in Gaza. The campaign was prepared several months ago, but the timing was devastating. Managers can hire an army of politically sensitive readers, but senior managers need to be trained to discern what could be a politically sensitive problem and how to quickly and effectively contain an open fire. 

Shifts in power between states and private corporations

Today, corporations have increasing social responsibilities at home and abroad because of their huge power. As Spider-Man popularised, ‘with great power comes great responsibility.’ This raises the question: Could this trend lead to the ultimate end of corporations managing states instead of political or public structures? This system, also known as ‘corporatocracy,’ is widely viewed as an undesirable outcome.

As such, in the dance between the state and corporations, the corporation must be an equal dancer, not a follower. The challenge is to find the fine line between social engagement and corporate objectives. If the corporation is tasked with social/political roles, it must also be given social/political power. We cannot expect the corporation to remain only a passive actor (follower), it must be elevated and accepted as an active actor (equal dancer). 

Also read: Business and politics should never mix – or should they?

This balance between dancers does not exist because corporations are deemed to pursue private interests while states pursue public ones. But this is debatable. Many private corporations have demonstrated their ability to serve the public more effectively than some states or political leaders. For instance, cases of bribery and corruption are prevalent in political circles, while some corporate leaders have demonstrated their philanthropic commitment and ethical conduct.

At some point, political leaders should accept that they are fallible, and corporate leaders should accept their social responsibility. Only then can a dance with equal partners occur.

Author is a professor of Geopolitics at ESSEC Business School Asia-Pacific.