managing global risk

7/30/2019 Managing Global Risk

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How managing political riskimproves global businessperormance*

P

wCAdvisoryandEurasiaGroup

P

erformanceImprovement


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Situation p. 02

Companies doing business internationally are grappling with political

issues that sometimes surprise even the most experienced. A newstudy by PricewaterhouseCoopers and Eurasia Group shows thatdespite current eorts, a high percentage o multinational companiesbelieve they are not doing all they could to manage political riskeectively.

Our perspective p. 04

PricewaterhouseCoopers and Eurasia Group believe that moreeective management o political risk can help companies protecttheir investments and take advantage o new opportunities, therebyimproving global business perormance. In our view, this requiresleaving behind ear and uncertainty and integrating political riskmanagement into a systematic process embedded in a companysother business processes. Companies doing business internationallyare, by nature, willing to take big risks. We believe that big risk takersshould be inormed risk takersand political risk management is anessential element o risk-taking savvy.

Implications p. 20

When it comes to improving global business perormance, managingpolitical risk helps in two undamental ways. First, it protects new andexisting global investments and operations by helping managementanticipate the business risk implications o political change or

instability. Prepared and aware, management is more likely to beable to exit markets that are in danger o growing too unstable.Where short-term instability does not dampen the appetite to pursuelong-term opportunity, management can implement risk mitigationand operational oversight to control against shocks. Second, or acompany constantly on the lookout or new opportunities, monitoringpolitical risk within target regions or across continents can helpmanagement hone in on political developments that oretell abusiness boom, beating competitors to the punch.

Methodology p. 32

Appendix p. 33

Table o contents


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SituationWhat is the best way tomanage political risk?


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Companies are drawn to expand into international markets in searcho lower costs, new opportunities, and access to resources. When theyarrive, however, they oten nd that the politics o oreign environments

adds risk and complexity to business perormance. A question orcompanies operating internationally thus becomes how best to managpolitical risk.

Multinational companies as a group are making eorts to managepolitical risk, but most are not doing it as well as they think they shouldIn a recent PricewaterhouseCoopers and Eurasia Group study, the vastmajority (83%) o respondents said they engaged in ongoing monitorino the political environment ater an investment had been made, butnearly as many (73%) did not eel that they had eective political riskmanagement processes.1

Risk managers, chie nancial ocers, and international divisionheads contacted or our survey said requently that the complex

web o inormation that would enable them to assess political riskwas dicult to obtain and evaluate. Many expressed rustration thatwhen they were able to glean inormation rom local sources, theinormation was inevitably biased. Moreover, unding or specic riskmanagement techniques (e.g., risk mapping) was oten lacking withintheir organizations, because the benets were not well understood.

As a result, CEOs and boards o directors were not getting the timely,accurate inormation they needed to make good decisions aboutinternational exposuresor, conversely, inormation was not eectivelycommunicated and utilized to manage risk in the eld.

Executives o global companies are clearly challenged regarding howbest to assess political risk, actor it into their investment decisions, an

use the knowledge to help improve global business perormance.

Situation

1 PricewaterhouseCoopers and Eurasia Group survey; see Methodology and Appendix sections.


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Our perspectivePolitical risk managementstarts at the top.


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Experience tells us that there are two undamental ways in whichmanaging political risk improves global business perormance:

1. Protecting new and existing global investments and operations2. Capitalizing on opportunities resulting rom political change

It is our belie that by establishing a systematic approach to political rismanagement, multinational companies can drive business perormancimprovement.

We know that the task o managing political risk is not easy. Not onlydo political changes pose direct risks to rms, but politics is alsoa component o other external risks. Regulatory changes have thepotential to promote or inhibit market competition, social risks otenhave political bases and responses, and political mismanagementcan turn natural or human-made events into catastrophes. Moreover,

political risk is oten perceived to be outside o managements control,making it dicult to dene, predict, and align with objectives. Given thecomplexity o these issues, it is no wonder that corporations oten ail taddress political risk in a systematic way.

Our perspective


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PricewaterhouseCoopers and Eurasia Group believe that politicalrisk can be managed eectively. We believe that doing so requiresintegrating political risk management into a systematic process

embedded in a companys business processes and characterized bythe same principles or components that apply to eective enterprise rismanagement.1 The underlying principles o the systematic political riskmanagement process we advise are:

1. Political risk management starts at the top

2. Managing political risk directly impacts perormance

3. Evaluating political risk optimizes decision making

4. Assessing risks beore taking action delivers value

. Systematic political risk management protects investments

Companies operating internationally would do well to examine theircurrent approach to political risk management and determine whetherit is contributing as eectively as it could to business perormance.Chances are, those who do so will nd areas or improvementjust asthe majority o companies in our survey did.

1 Several principles and concepts o political risk management reerenced within this document correlate to thecomponents o enterprise risk management as described in Enterprise Risk ManagementIntegrated Frameworreleased in 2004 by the Committee o Sponsoring Organizations o the Treadway Commission (COSO).

Our perspective


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Political risk management starts at the top

Senior management needs to be mindul that politics is a driver

that creates both risk and opportunity. Executives must acceptresponsibility or managing political risk, set guidelines or approachingit comprehensively, and actor political risk assessments into decisionmaking about global strategy and ongoing operations.

Guidelines and responsibility or political risk should be set andaccepted at the senior management and board level. This includesestablishing and implementing a risk management ramework in whichmanagements tolerance or risk is communicated to decision makersand rewards are measured on a risk-adjusted basis. In other words,management must ensure that international expansion is strategicallydeliberate, not a close your eyes and cross your ngers bet.

While our survey ound that the board and/or senior management were

in a majority o cases, ultimately accountable or shaping internationalstrategy and political risk guidelines, responses were less uniormaround the question o who has ongoing responsibility or monitoringand managing political risk. Many respondents indicated some oversigwas conducted by a risk management unction, but ew were ableto point to ownership o political risk management at a business unitlevel. Understandably, new and unamiliar parts o the organizationand its operating environment are generally less transparent tocorporate management and thus require more care and oversight romthe corporate center. Overall, the eort must begin at the top o theorganization and continue to have visible executive support. However,within these oversight mechanisms, creating meaningul accountabilityat the business unit level or international operational perormancesupports the business case or going global.

Our perspective


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Managing political risk directly impacts perormance

Most companies manage political risk in order to avoid nancial

surprises,

but eective risk management can also enable companies tocapture opportunities they may not otherwise have seen.2 Indeed, whilcorporate leaders are oten acutely aware o the potential downsiderisks o international investments, changes to the political, social, andeconomic environment can also produce windalls. For example, aspart o Chinas World Trade Organization (WTO) accession, the Chinesegovernment promised to gradually open previously protected sectorsat the end o 200, including the lucrative express delivery market.Being attuned to this policy allowed one oreign company to buy outits joint-venture partner, gain direct access to interior cities once closedto oreign rms, and shit its Asian regional logistical hub to mainlandChina. The investment will not only signicantly upgrade the companyability to serve Chinas domestic market, but will also greatly increase

its corporate prole among local and central government stakeholdersIn this case, the company took advantage o a changing regulatoryenvironment in order to expand its existing operations and increasemarket share.

Evidence o the impact o successul political risk management onperormance is compelling. One European rm saved millions byanticipating political changes in Argentina in 2001 and Venezuela in200. Thanks to this rms political risk monitoring process, the seniorvice president in charge o risk received early warnings that the politicasituation in the two countries was beginning to deteriorate. As a result,he was able to repatriate the rms equity and shit to local nancingbeore each country went through its political and economic crisis.

In a win/win outcome, the company avoided losses and maintainedoperations in those countries.

Our perspective

2 The survey indicated that 7% o respondents evaluate political risk primarily to avoid nancial surprises andincorporate a measure o political risk into their nancial projections or new investments; 39% monitor politicalrisk to anticipate national leadership and policy changes; 19% monitor political risk with an eye towardinfuencing policy; and 18% do so to participate in social change.


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In another case, a technology company with operations in more than120 countries has begun setting up an early-detection system to identpolitical events that may aect its suppliers, many o which are privatel

held rms in politically volatile countries. It takes the company at leastsix months to nd and establish production with a new supplieranexpensive and time-consuming process. Moreover, the company ndsit dicult to assess a private suppliers nancial integrity or ability towithstand external shocks. The companys strategy, thereore, is toorecast political events that could aect supplier balance sheets. Withits new system in place, the company hopes to be able to take steps torealign supplier contracts beore political crises precipitate shortages.

Although all multinationals may improve perormance by bettermanaging political risk, not all companies should approach political riskmanagement in the same way. The potential business impact o politicrisk varies with a companys international exposure and is infuenced b

the companys industry, size, and location.Not surprisingly, the PricewaterhouseCoopers and Eurasia Groupsurvey ound that companies in industries with a large capital assetbase and raw material requirements that constrain their location choiceare more strongly attuned to long-term political risks. These rms alsotend to be in heavily regulated industries, such as energy, mining,and telecommunications. With limited agility, they seek to monitorlegal and regulatory trends as well as the likelihood o major politicalevents such as changes in regime. By contrast, rms with more fexibleoperating platorms, such as retail and consumer products companiesare more concerned about short-term risks such as protests, strikes,and near-term reputational risks that could aect brand image. Theseconsiderations should and do infuence the approaches a companyuses to identiy, evaluate, and manage political risk.

Our perspective


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Contrasting industry examples rom our studies and work in theeld illustrate this point. One major oil company has a dedicatedpolitical risk unction that develops 20-year scenarios showing how

potential shits in global politics could impact its operations. Thecompanys representatives work with local political leaders to ensurethat the companys needs are known and well represented in thepolitical process. Their eorts are supported by the strong reputationthe company has built through its comprehensive approach to socialresponsibility.

By contrast, consumer products companies oten ocus their concernon the political components o supply chain risks, reputation, andmarket penetration. For example, social unrest could block transportatroutes to and rom sources o raw materials, and labor strikes couldstop production. Such companies, even i they have no internationallocations o their own, need to develop contingency plans to weather

potential disruptions to supply chains and distribution channels. Theability to gain market share also has a political component: A majorretailer entering a new market wants to ensure that its brand is perceivas culturally sensitive, eective, and sustainable, which requires anunderstanding o local culture and customs. Positive relationships withlocal political leaders are no less a part o the equation or these typeso companies than or those with large capital asset bases, but thestakes are dierent when a company is not bound to specic locations

Our perspective


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Ultimately, risk takers should be inormed about the risks they take.In general, the more a company ventures beyond its home countryphysically or through outsourcingthe more it increases its exposure

to political risk. Companies should keep in mind, however, that evena minor investment involving a major risk or opportunity can have amaterial impact. Among the companies in our survey, those with ahigher proportion o international operations (including European rmsand rms with revenues o at least $12 billion) consistently exhibitedmore systematic political risk management processes. BecauseEuropean rms typically have relatively small domestic markets andhigher labor costs than in other parts o the world, these companieshave been more likely to expand into international markets than theirNorth American counterparts. Greater international exposure as a resuo revenue size or headquarters location leads companies to seekto institutionalize the political risk management process. Europeancompanies, or example, were almost twice as likely to have ormal

processes in place to channel inormation rom local sta upward.They were also more likely to use leading practices, such as generatingregular political risk reports and holding boards o directors and senior-level executives responsible or setting political risk guidelines and orrisk accountability. Companies that have a higher ratio o internationalto domestic assets or revenues and/or that rely on a global value chainneed to be more sophisticated in their political risk management.

One thing all o these companies have in common: an increasingrecognition that political risk can directly impact the bottom line.

Even a minor investmentinvolving a major risk canhave a material impact.

Our perspective


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Evaluating political risk optimizes decision making

In addition to return on investment, management should also consider

political and other types o risk when making capital allocation andstrategic and operational decisions. This improves alignment withcorporate objectives and risk appetite, yielding better decisions.

When making perormance-related decisions, management should alsconsider its portolio o political risk. Viewing political risk in terms o aportolio can mean two things:

1. Risks do not occur in isolation, and their potential business impactsshould not be considered in isolation. This is especially true orpolitical risk, which is commonly viewed as an external risk actor bucan have a signicant impact on internal risk actors. For example,a regime change that portends increased social hostility to oreign-owned businesses can lead to burdensome changes in regulation b

can also negatively impact credit risk, aect employee attitudes, andshrink the local customer base.

2. A portolio view o risk can mean looking at political risk across theglobe as an investment portolio rather than as isolated, country-by-country investments. A high-risk/high-reward potential venture in anuntested market, while possibly outside managements standard risktolerance (the acceptable level o variation regarding objectives), canbe a wise investment i there are osetting, low-risk ventures beingundertaken that eectively serve as a hedge against excess volatility

Our perspective


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Consider, or instance, the discrete go/no-go decisions thatmanagement typically makes about oreign investments. By notweighing a range o investment opportunities in a target country and its

neighboring states, companies end up under- or overexposed in certaimarkets. However, i risk managers develop an understanding o howpolitical shits in one area o the world can tilt their overall risk portolio(a goal reported by risk managers in our survey), management couldimprove strategic positioning and overall decision making.

A diversied European companys approach illustrates how a rm canconstruct a portolio view o political risk and use it to identiy whichareas in the world need to be monitored more closely. This companyrecognizes that political events oten pregure economic risks. Forexample, a weak prime minister or divided parliament may be unableto pass economic or social reorms in times o crisis. Thereore, thecompany employs what the risk manager reers to as a weighted,

weighted average cost o capital to assess its ideal country exposure.The rms goal is to spread its portolio as evenly as possible acrossits target countries, taking political risk into account. I the rmslevel o investment is below the preerred amounta unction o therms country-risk rating, the countrys GDP, and the rms marketcapitalization and current country exposurethe company tries toincrease exposure. I the rms exposure is near or above the preerredamount, risk managers keep a close eye on political developmentsin that country. Because this companys model ocuses on overallrisk exposure, the company ends up monitoring empirically stablecountries as well as those less stable. The risk manager reassessesthe companys international exposures on a continuous basis. Themethod also serves as an early-warning system, and has helped the

rm repatriate equity and shit to local unding sources as country riskincreased in several nations.

Our perspective


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Systematically gathering andprocessing inormation is moreimportant than the choice o

quantitative versus qualitativeanalytical methods.


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Assessing risks beore taking action delivers value

Companies need a comprehensive ramework or identiying and

assessing all o the risks they ace, understanding interdependencies,and assessing the impact o risk. Such a ramework enablesdevelopment o mitigation strategies that support company operationsthrough crisis and change. The ormal process o gathering andassessing data on political developments should be overseen by arisk manager and disseminated at the corporate, operating unit, andregional level.

The level o analysis applied to the inormation gathered should varywith a companys international exposure. Firms acing less severepotential impacts commonly use rules o thumb to adjust earningsexpectations or oreign investment to refect the level o risk. Onthe other hand, rms acing signicant business impacts (energy

companies are a good example) typically develop more nuancedpictures o political risk, creating scenarios that synthesize severalindicators o risk and varying their risk weightings in concert withreal-time changes in the political landscape.

Having a systematic way o gathering and processing inormationis more important than the choice o quantitative versus qualitativeanalytical methods. Companies in our survey use a variety o methodsto evaluate political risk, and neither qualitative approaches (used by80% o respondents) nor quantitative (used by 33% o respondents)were denite indicators that a company was eectively managing risk.3

A more signicant indicator o risk managers sense o eectivenesswas whether the company was regularly collecting risk inormation and

building it into scenarios or the uture.Most companies do not need to be convinced that they should enternew markets with their eyes wide open, but dierent companies usedierent levels o systematic analysis in their investment strategies.Up-ront assessment o an investments risks and opportunities makesgood sense, and it should be accompanied by the implementationo mitigation strategies, where risks have been identied in order toprotect the upside.

Our perspective

3 The sum is greater than 100% because some rms use both methods.


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Accumulation o reliable inormation and accurate interpretation obusiness consequences are oten stumbling blocks or rms seeking toimprove decision making through evaluation o political risk. Thereore,

we advise the use o multiple sources o inormation and periodicthird-party vetting o analyses prepared by risk managers as part oan ongoing, systematic approach to political risk management. In oursurvey, 70% o respondents reported that they rely most heavily oninternal resources (such as their M&A group and in-country contacts)when entering new markets. Lawyers (%) and bankers (42%) arethe second most requently consulted sources o inormation. Thosemonitoring political risk rely most heavily on the media (89%), ollowedby the companys home country government (80%), local employees(8%), and independent research rms (1%). Because each othese sources has its merits and limitations, companies should weighinormation rom several outlets.

The degree o reliance on local sources or inormation warrants speciaattention in most companies because, as we have ound, long-termexpatriates and local employees rarely provide an objective view othe political environment. Their biases are largely unintentional, but areinherent to their roles within the company. Expatriates may perceivelower risks because o the level o comort they have developed workinin a country. As one risk manager said with exasperation, I have manypeople who want to put another plant in the Philippines [where thepolitical situation is deteriorating], because theyve been there. Thatsthe only reason they use.

Our perspective

Long-term expatriates and localemployees rarely provide anobjective view o the politicalenvironment.


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Local employees, or their part, may be prohibited rom voicing theirtrue political opinions (in countries with repressive regimes); they maybe inured to the risks that arise in their countries; or they may be too

strongly tied to the countrys ruling elite to provide an objective view.Similarly, companies that look directly to a countrys political leadersor insight are getting a strongly subjective perspective. Anotherrisk manager commented that despite the volatile political situationin Venezuela, Ive got my guy in Caracas telling me everything isne! With limited ability to gauge the veracity o inormal reports,management at headquarters cannot make sound decisions that canhelp protect long-term investments.

In the ace o these diculties, management should establish aprogram or actively monitoring and managing political risk. Such aprocess would operate across business lines, establishing eective,ormal procedures or gathering, interpreting, and evaluating political

inormation rom multiple sources, andwhen the stakes are highsubmitting analyses to third parties or evaluation.

Our perspective


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When communication networks are not ormalized, the ailure todeliver inormation upward to senior management or downward toeld operations can obstruct eective and timely decision making.

Companies that intend to systematically monitor political risk musttake steps to ensure that political risk inormation is available where itis needed and that it is used to support decision making. Monitoringroutines and opportunity-identication must take place both centrallyand in the business units. This means communicating political riskanalyses into the eld, soliciting eld-based inormation and analyses,and providing guidance on how to use inormation to assist localmanagers in their strategic planning and tactical operational decisionmaking.

Once companies commit to an international presence, they shoulddo all they can to assure sustainability. Understanding the politicalenvironment and operating as good corporate citizens can take

companies a long way toward achieving that goal.

Our perspective


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ImplicationsEmbed political risk considerationsin normal business processes.


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Companies expand across borders in search o greater value. Yetour survey ndings and experience clearly indicate the struggle manycompanies experience in trying to reap the benets o globalization. A

key actor: issues related to managing political risk.Long-term sustainable success internationally depends in good parton a companys ability to grasp the implications o political risk andapply them to business risk. This means moving beyond avoidanceand anxiety about political risk toward a structured way o seeing it as precursor o both economic risk and opportunity. By embedding politicrisk considerations in normal business processes, companies enablemanagement to make better decisions regarding global expansion,sourcing, branding, intellectual property protection, community andgovernment relations, operational structures, and other business issuethat arise in complex international markets.

Implications

Sustainable successinternationally dependsin good part on acompanys ability tograsp the implications opolitical risk and applythem to business risk.


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Managing political risk improves global business perormance intwo undamental ways. First, it protects new and existing globalinvestments and operations by helping management anticipate the

implications o political change or instability on business risk. Preparedand aware, management can, where possible, exit markets that are indanger o growing too unstable. Where short-term instability does notdampen managements appetite or pursuing long-term opportunity,management can implement risk mitigation and operational oversightto control against shocks. Second, or a company constantly on thelookout or new opportunities, monitoring political risk within targetregions or across continents can help management hone in on politicadevelopments that oretell a business boom, beating competitors tothe punch. The BRIC countries (Brazil, Russia, India, and China) are alesson in this regard. Many large multinationals now regard a presencein these countries as a competitive imperative, but companies thatentered late or were unaware o political risk actors have had a wild

and sometimes unpleasant ride. Many are still waiting to realize thepromised opportunity.

Implications


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O course, the degree to which a company stands to gain romeectively managing political risk depends in signicant part on theextent o its risk exposure. Any one or more o the ollowing actors can

characterize a corporation or which political risk ought to be a centralconcern:

Large capital asset base abroad

High ratio o international to domestic revenues

Dependence on a global supply chain

Heavy concentration o assets and/or operations in a single countryor region

Strategic reliance on international growth

Political risk exposure is also a unction o where a company is investe

such as in: Developed, rather than emerging markets

Locales where the company and its management have a successultrack record and dependable relationship networks

Communities where the presence o a oreign multinational is not anautomatic liability

Implications


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In dynamic political environments, a protable past does not necessariportend ongoing successone reason why a strong reputation or goocorporate citizenship can smooth the transition or a company operatin

in a region undergoing political change.Because all companies, even primarily domestic ones, are aected bypolitics to some degree, all need a baseline o political risk managemeactivity. At a minimum, company management should be aware o howpolitical risks aect business processes, and they should actor theserisks into both investment decisions and general risk management.

The table on pages 2931 provides a ramework prescribing increasinglevels o political risk management structure or companies withincreasing levels o political risk exposure. However, because largeinstitutions have been ravaged by ailures even in seemingly minormarkets, any company would benet rom raising its responseto political risk or expressing its current situation or expansion

opportunities on a risk-adjusted basis.

Implications


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Companies may want to ormally assess their current political riskmanagement process to determine how well it adheres to the structureprinciples we have outlined here. This assessment can be undertaken

with the ollowing steps:1. Map the politics

Does the current process identiy country-by-country operations,relative exposure or potential exposure in each jurisdiction, a portolcross-country view o risk, and political risk actors that can aectbusiness operations?

2. Evaluate the risksIs there a structured approach to translate the business risks thatmay arise rom potential political change and analyze their potentialbusiness impact?

3. Assess controls and plans

Is the quality o controls and risk mitigation plans sucient relative tthose business risks?

4. Determine the acceptability o residual riskHow are decisions made about the risk that remains ater mitigationsteps have been taken, relative to managements risk tolerance orother possible responses to those risks?

The pervasive infuence o political risk on other risks and thecomplexity it introduces into a global expansion strategy pose uniquerisk management challenges, but the challenges o predicting andmeasuring political risk should not be taken as reason to discount it.Rather, such challenges validate the need or a more comprehensive

understanding and systematic processing o political risk and its impacon a companys global strategy, operations, and competitive landscapeManaging political risk systematically makes new markets moretransparent. By implementing a political risk management ramework,corporations are better equipped to realize the benets o globalizationwhile protecting against unwanted surprises.

Implications


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What kind o a risktaker are you?


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All companies, even those with limited international operations, areexposed to political risk. Levels o political risk exposure grow as rmsexpand internationally or as the countries o operation themselves

become more risky. Companies with one or more o the political riskexposure actors listed below should be taking a closer look at howpolitics infuences their organization. Special attention should be paidto political risk i a rm has a great number o these attributes or highsensitivity to any particular actor. The actors are:

Large international capital asset base

High ratio o international to domestic revenues

Dependency on international supply chain

Concentration in one country or region

Expansion plans

Limited experience with international business or new locations

Dependency on international growth

Operations located in nascent or emerging, not developed markets

Reputation sensitivity

Implications


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Changes in the political environment itsel can also increase a rmsexposure to risk. While the political risks that can aect a rm are manyand varied, companies should pay particular attention to the political

environment when one or more o the ollowing occur: Change in government leadership is imminent

Economic environment is deteriorating or improving rapidly

Political bodies are debating regulatory changes

Multilateral agencies are considering changes to trade agreements

Social unrest is common or imminent

The ollowing table highlights the actions o inormed risk takers inrelation to the level o political risk exposure their company aces.

Implications


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Implications

Political risk managementstarts at the top

Low exposure

Assess how political risk aects corporatestrategy and business processes.

Develop guidelines to actor political riskinto decision making processes, such asinvestment and divestment decisions.

Moderate exposure

Assess how political risk aects corporatestrategy and business processes.

Develop guidelines and procedures toactor political risk into decision makingprocesses, such as investment, divestment,and operational optimization decisions.

Conduct periodic assessments o politicalrisk to evaluate exposure, opportunities,and impact on existing operations.

High exposure

Understand how political risk createsopportunities, impacts returns, and altersoverall risk prole.

View politics as a predictive tool or

economic shits and growth indicators. Establish political risk management

guidelines, accept accountability orrisk at the C-suite and board level, anddemonstrate visible executive support.

Dene guidelines and processes that allowpolitical risk inormation to be usedproactively to inorm investment, operating,and divestment decisions.

Develop a procedure to evaluatecompliance with political risk managementguidelines.

Managing political risk: exposure levels andinormed actions

Low exposure

Assess how political risks impact globalexpansion plans, existing investments, anongoing operational perormance.

Develop a process to take timely actionin cases where political risks provideopportunities and/or challenges.

Moderate exposure Dene a risk-tolerance measure that will

guide actions when political risks provideopportunities and/or challenges.

Use political risk inormation to determinetactical strategies such as investment typin-country relationships, operational setupcapital allocations, and commitments.

Develop a method to actor political risksinto risk-adjusted rates o return; regularlyreview and adjust expected rates o returnbased on shiting political risks.

High exposure

Design a process that weighs political

risk in relation to investment objectives,risk tolerance, and potential returns andopportunities, and results in timely actionregarding international investments andoperations.

Develop a method to actor political risksinto risk-adjusted rates o return; regularlyreview and adjust expected rates o returnbased on shiting political risks.

Use political risk inormation to determinetactical strategies such as investment typin-country relationships, operational setupcapital allocations, and commitments.

Dene political risk perormance metricsto assess ongoing perormance oinvestments and operations against targe

goals, expected returns, and political riskconsiderations.

Managing politicalrisk directly impactsperormance


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Evaluating politicalrisk optimizes decisionmaking

Low exposure

Understand political risk exposures acrossoperations.

Monitor relevant political environments todetermine international investments, andadjust capital management and expectedreturns across existing internationalinvestments.

Moderate exposure

Understand political risk exposures acrossoperations.

Monitor relevant political environmentsto adjust capital management, expectedreturns, and political risk exposure basedon international portolio, businessobjectives, and risk tolerance.

Factor political risk into nancial andoperational perormance metrics.

High exposure

Develop an iterative approach to managingpolitical risk and international investment

portolio. Monitor relevant political environments

to adjust capital management, expectedreturns, and political risk exposure basedon international portolio, businessobjectives, and risk tolerance.

Measure international investment optionson a cross-country, intra-country, andregional basis to weigh risk and returnoptions as aligned with strategic objectivesand risk parameters.

Systematic political riskmanagement protectsinvestments

Low exposure

Develop a process to regularly collectand report on political risk to C-suite andboard.

Disseminate political risk inormation tooperating units in a orm that is usable anrelevant.

Moderate exposure Gather political risk data rom multiple

sources including in-country networks,on-site management, and objective thirdparties.

Develop a process to inorm C-suite andoperational levels o relevant political riskinormation on a regular basis.

Use political risk inormation proactively tinorm investment, operations, and crisis-preparedness decisions and plans.

High exposure

Gather political risk data rom multiplesources including in-country networks,

on-site management, and objective thirdparties.

Develop a process that evaluates politicarisk inormation and translates it intomeaningul, actionable, and tactical dataregarding business risks and opportunitie

Communicate political risk inormation ona proactive, timely basis throughout theorganization, especially to decision makerat the corporate and operating unit levels.

Provide guidance on how to use politicalinormation to assist corporate, businessunit, and regional managers strategicplanning, operational processes, and crisipreparedness.

Embed political risk management andmonitoring processes in the organizationas part o overall business risk practices.

Implications


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Implications

Low exposure

Establish guidelines and responsibility orpolitical risk at senior management andboard level.

Integrate political risk management intoongoing business risk management andmonitoring procedures.

Understand and assess internal

capability to operate in new, internationalenvironments.

Moderate exposure

Establish guidelines and responsibility orpolitical risk at senior management andboard level.

Assign ownership o political risk monitoringand management at the corporate andbusiness unit level.

Develop a ormal method to assess politicalrisks quantitatively (where appropriate) andqualitatively.

Evaluate political risks routinely or ongoingoperations, and disseminate reports on

political risks throughout the organization.

Assessing risks beore taking action delivers value

High exposure

Designate a risk manager responsible ormanaging political risk in coordination witbusiness units and geographies at theheadquarters level and make this manageaccountable to a C-suite executive.

Assign responsibility or political riskmonitoring and management at the

operating unit and regional level. Implement a ormal process, overseen by

risk manager, to gather and process data political developments and disseminate thdata at the corporate, operating unit, andregional level.

Analyze political risk issuescomprehensively (quantitatively andqualitatively) and regularly. As appropriatevet with third parties.

Track shits in the external environmentover time, and use to anticipate changesto operations, revenue streams, andinternational strategy.

Establish ongoing political risk monitoring

routines and early-warning systems toidentiy opportunities and challenges,with eorts coordinated centrally and withresponsible business unit and regionalmanagers.


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Methodology

PricewaterhouseCoopers and Eurasia Group conducted a survey ohow more than 100 multinational rms understand and manage politicarisk. Our initial survey was ollowed by in-depth interviews with 13respondents who volunteered to participate in urther discussions. ThePricewaterhouseCoopers and Eurasia Group political risk survey wasconducted between December 200 and February 200. The targetpopulation was PricewaterhouseCoopers largest clients worldwide(not including nancial services organizations, which because o their

unique exposures to political risk warrant separate attention), whereEnglish is generally spoken in the business community. By region,2 interviews were conducted with North American companies, 43with European companies, and one with an Asian company. Fortyrespondents were in the industrial products industry; 19 were in retailand consumer products; 18 were in energy, utilities, and mining; 12 wein technology and telecommunications; and 17 were in proessional anpersonal services. Thirty-three respondents generate less than $3 billioin revenues, 4 companies generate between $3 and $12 billion inrevenues, and 24 generate in excess o $12 billion. The revenues o oucompanies were unavailable.


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Appendix


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Findings rom thePricewaterhouseCoopers and Eurasia Group survey

Appendix

There is signifcant room or improvement in managing political risk.

Senior management eels that political risk is important, but is not integrated eectively intoanalysis o new ventures or ongoing business unit perormance.

We dont consider political risk

Political risk is important, but we dont manage it in a systematic way

Political risk is part o our risk management process, but is not integrated as eectively as it could be

Political risk is a major concern, and we approach it in an eective, systematic manner

Percentages do not add up to 100% due to rounding.


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Political risk management starts at the top.

Firms with greater international exposure, e.g., European rms, are more likely to set political rmanagement guidelines at the board and C-suite level.

North American European To% %

Board o directors 3 3

CEO 32 48 CFO 32 38

Chie risk ocer 21 28

International division director 1 20

Regional manager 10

Functional manager 10

Risk manager/risk management board 13 0

Department/divisional heads & management 2 10

Legal counsel 19 10

Finance director/treasurer 2

Chie operating ocer 4 0

Business development oce 0 3 No one is assigned this specic responsibility 4

Percentages do not add up to 100% due to multiple responses.

Appendix


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Appendix

A more systematic approach is required.

Firms inrequently generate ormal reports on political risk or management.

Reports generated irregularly as events occur

We dont generate ormal reports

Quarterly

Annually

Monthly

Daily or weekly

Biannually

Dont know

Percentages do not add up to 100% due to rounding.


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Managing political risk impacts perormance.

Firms manage political risk primarily to avoid nancial surprises.

Avoid nancial surprises

Anticipate changes in political leadership and government policy

Infuence government policy

Participate in social change

Lower insurance premiums


Appendix


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Appendix

Assessing risk beore taking action delivers value.

Despite wide belie in the importance o risk assessment, companies do not use political riskinormation extensively in the evaluation o new acquisitions and ventures, and most use it eveless ater the investment has been made.

Use political risk inormation in ongoing international business unit perormance

To a great extent

To some extent

Not really

Not at all

Dont know

Use political risk inormation in new acquisitions and ventures

To a great extent

To some extent

Not really

Not at all

Dont know

Percentages in bottom table do not add up to 100% due to rounding.


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Appendix

Methods companies use to evaluate political risk.

Companies use a variety o methods to evaluate political risk, but neither qualitative norquantitative approaches were in and o themselves guaranteed indicators o eectiveness.

Qualitative assessments

Quantitative assessments


Systematic political risk management protects investments.

Multiple primary sources are used to gather inormation on political risk.

News sources (newspapers, wire services, magazines)

Government sources in the country where your company headquarters are located

Local employees

Independent research rms

Sell-side research rom banks

Local political leaders



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Appendix

Inormation sharing tends to be mainly inormal.

Firms use various methods to pass inormation about a countrys political environment to topmanagement.

Inormally via social networks between in-country management and headquarters

Formally via a process that channels inormation rom local sta upward

Internal sta at global HQ monitor political developments with minimal input rom international oces

External experts brought in as board members or consultants

Combination o the our options above

Monthly committee

None/missing

Dont know

Due diligence starts internally.

Companies rely most heavily on their internal resources when conducting due diligence to ente

new markets.

Internal resources

Bankers

Lawyers

Accounting or audit rm

Non-audit consulting rm



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For urther inormation, please visit:www.pwc.com/politicalriskwww.eurasiagroup.net

or call:Fred CohenPartnerPricewaterhouseCoopers1.4.471.822

Ian BremmerPresidentEurasia Group1.212.213.3112

200 PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers reers toPricewaterhouseCoopers LLP (a Delaware limited liability partnership) or, as the context requires,other member rms o PricewaterhouseCoopers International Limited, each o which is a separate andindependent legal entity. *connectedthinking is a trademark o PricewaterhouseCoopers LLP.

This material was produced by Eurasia Group or use by the recipient.This is intended as general background research and is not intended to constitute advice on anyparticular commercial investment or trade matter or issue and should not be relied upon or suchpurposes. It is not to be made available to any person other than the recipient. No part o this publicationmay be reproduced, stored in a retrieval system, or transmitted in any orm or by any means, electronic

or otherwise, without the prior consent o Eurasia Group. 200 Eurasia Group. All rights reserved.


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*connectedthinkinPerormance ImprovementPolitical Risk

managing global risk

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