Issue #35                                                                                       April 2022
Boards of Directors and the Return of Geo-Political Risks
Professor Jordi Canals
IESE Center for Corporate Governance, President

Over the past three decades, boards of directors considered globalization and the new emerging markets as significant corporate growth opportunities. Western companies’ huge bet on BRICs (Brazil, Russia, China and India) and other emerging countries – with their growing number of middle-class families –, became the paradigm for international expansion. Moreover, the trend towards greater globalization and the search for low cost and arbitrage opportunities pushed companies to offshore many of their manufacturing activities and locate them in these low-cost countries. Efficient global supply chains – from sourcing to final product manufacturing – became the new gold standard of management effectiveness. Globalization seemed unstoppable and, with a few exceptions, boards of directors did not spend much time on assessing political risks.

Moreover, when the 2008 financial crisis dealt a strong blow to Western economies – whose banking systems were badly hit – it was a positive surprise that many emerging countries weathered the storm reasonably well. In this situation, globalization showed resilience. Many companies quickly forgot about international operations’ risks and focused even more on how to exploit market opportunities in emerging countries. This is how a strong presence of Western companies in China, Russia and Brazil, in particular, grew even more robust after the 2008 crisis. 

Boards of directors overlooked geo-political risk since the emerging countries were growing and becoming economically more integrated with the West. These – countries had been admitted as members of the World Trade Organization (WTO) and adhered to the rules of free trade.  There was a shared perception that the adoption by the countries of the key principles and rules of the WTO protected companies from non-tariff trade barriers and any form of asset expropriation. Some risks remained, but most companies behaved as if they were non-existent.

The human and social tragedy of the Russian invasion of Ukraine has dealt a death knell to globalization as we knew it. Nevertheless, the crisis in Ukraine is not the first signal that geo-political risks have not disappeared. Over the past few years, a number of political and social crises sent clear indicators of this. The invasion of Crimea and eastern parts of Ukraine by Russia in 2014; Brexit in 2016; the election in 2016 of a US president who did not believe in an international system based on rules and principles; the challenges of Brazil, India and other emerging countries in reforming and sustaining internal  growth; the increasing role of the Chinese government in controlling the economy and private companies; the effects of offshoring and international logistics and transportation on the environment due to growing CO2 emissions; and the disruptive  effects of Covid-19 in global supply chains. These were all signals that the global system, developed since the 1990s, was not in good shape and that the economic model based on globalization had weaknesses in its foundation. 

The harsh reality of Russia’s invasion of Ukraine has awakened a new sense of political risk throughout boardrooms. Assessing political risk is even more complex than measuring financial risk. The main reason is that political risk is clearly associated with governmental decision-making in countries whose political system deviates from the rule of law and is driven by a leader or a few people at the top of the system. In such cases, people’s behavior becomes unpredictable and can have a disproportionate impact on political and economic outcomes. Consequently, companies should take political risk into account.

Boards of directors and senior managers should understand the factors that shape political risk, make a reasonable risk assessment, define the levels of country risk that the board considers reasonable and consistent with shareholders’ and other stakeholders’ preferences, and plan scenarios based on different assumptions. In today’s volatile world, boards of directors should work with senior management teams to stress-test their strategies, particularly their presence in emerging countries with unstable political systems.
A final reflection is necessary. Some analysts still predict that once the war in Ukraine is over, the world will go back to the previous trajectory of globalization. No one truly knows. Nevertheless, as IESE Professor Pankaj Ghemawat pointed out in his 2011 book, Wold 3.0, available data indicates that the global economy is not fully integrated. The international flow of goods and services, as well as the movement of people across countries, remains stronger with neighboring countries and regions, suggesting that the international economy is in a state of semi-globalization. In this world, economic regions represent a significant part of international trade and investment. This observation does not exclude that some industries are
more global, but they may be more the exception than the rule.

The effects of geo-political tensions, protectionist trade policies, economic nationalism, and the Ukraine-Russia conflict on global supply chain disruptions suggest that the semi-globalized world is here to stay. The main implication is that companies should consider that investing in emerging markets is not risk-free, as the tragic recent events have shown. Boards of directors should consider political risk a top area of concern when analyzing investments outside of their home countries, and integrate it coherently into the firm’s strategy and sustainability plans. Boards should develop the ability to understand and analyze political risk in detail to survive in this semi-globalized world.


Corporate Governance Trends and Reports

The long-awaited proposal of the European Commission to present a framework to regulate ESG corporate policies was recently published on February 23, 2022. The new  Directive of the European Parliament and the European Council on Corporate Sustainability Due Diligence (Corporate sustainability due diligence | European Commission ( was less ambitious than initially expected. It mainly covers environmental policies and protection of human rights related to safe and healthy working conditions. The new framework will apply to all EU limited liability companies employing more than 500 people and with a revenue above €150 million.
The US regulator is also stepping in on ESG disclosure. The US Securities and Exchange Commission (SEC) recently  issued a  Statement on a Proposed Mandatory Climate Risk Disclosure | Statement on Proposed Mandatory Climate Risk Disclosures. The SEC had traditionally relied on market forces and the pressure of institutional investors to advance ESG policies. This proposal is a turning point in SEC’s policies and corporate governance regulation. 
Investors are making new demands on boards of directors regarding executive compensation. Linking executive compensation to ESG goals and performance is the new fashion. Previous models of compensation linking executive pay to some financial indicators were not particularly effective in connecting compensation with corporate performance. Even if ESG goals seem to involve some positive dimensions both for companies and society, designing executive compensation schemes around this idea may not be a good policy. Professors Lucian Bebchuk and Roberto  Tallarita discuss these issues in this paper:  The Perils and Questionable Promise of ESG-Based Compensation by Lucian A. Bebchuk, Roberto Tallarita.
In this newsletter, we have often argued that the logic behind the construction of lists of ESG factors is not very reasonable. ESG dimensions involve different types of factors that were aggregated by institutional investors a few years ago. Their common attribute was that they described factors not included in financial reporting. But the nature of E factors is different from the essence of S factors. G factors are completely different from the other two groups. Aggregating them all in single scores for the purpose of ratings, or to build an investment portfolio, does not make much sense. A new article by researchers at the Bank for International Settlements discusses this issue from an investment perspective: Deconstructing ESG scores: how to invest with your own criteria (
For most companies, this is the season of annual shareholders’ meetings. A review of the engagement policies and main issues that large investors want to highlight, as well as the criteria they will use in proxy voting, is particularly useful. BlackRock provides a comprehensive review of its voting policies that reflect their governance concerns: PowerPoint Presentation (
A practical assessment of recent  international developments on corporate governance is offered by a recent  Russell Reynolds report: 2021 Global and Regional Trends in Corporate Governance | Russell Reynolds Associates.
A final note on the role of the board in talent development. The “Great Resignation” is a major trend in many Western countries, creating problems for companies. Boards should understand this trend and ask the top management team to work on how to overcome it. This article explains why the big quit was not triggered by the health crisis and will stay with us well  beyond the pandemic: The Great Resignation Didn’t Start with the Pandemic (
A Way to Learn. A Mark to Make. A World to Change
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