Corporate boards face increased complexity today, with heightened geopolitical risk key among the concerns they must consider as they guide the companies they serve. Increasingly, boards are expected to have greater knowledge of geopolitical matters and their potential implications for companies. In this episode of the Inside the Strategy Room podcast, Sean Brown talks with Dominic Barton, who previously served as our global managing partner, Canada’s ambassador to China, chair of Canada’s Advisory Council on Economic Growth, chair of the International Advisory Committee to the president of South Korea on National Future and Vision, and is now board chair of Rio Tinto and LeapFrog Investments and sits on several other boards and advisory boards. Also joining the conversation is Frithjof Lund, a senior partner who leads our board services service line, and Ziad Haider, a partner and global director of geopolitics. This is an edited transcript of their conversation, which was recorded in September 2024. For more discussions on the strategy issues that matter, follow the series on your preferred podcast platform.

Sean Brown: Are boards generally aware of the scope of geopolitical risks they now face? Or do they tend to focus more on macroeconomic factors and other areas like technology?

Frithjof Lund: We do see from some of the board research, in general, that there is a very clear perception of an increasing complexity surrounding boards and the role of boards. This is linked to stakeholder and shareholder complexity; it’s linked to the increasing business complexity; and, of course, we also see increasingly complex market forces linked to macroeconomic changes and geopolitical changes. Interestingly, in our global board survey, less than half of the board directors actually put geopolitical and macroeconomic risks on the board agenda currently. What surprised us even more is that we see a very low proportion of board directors actually say this is a priority topic for their organizations to address. Twenty-five percent say that geopolitical and/or macroeconomic risks are a priority topic, and only 19 percent say that the political risks are a topic.

Ziad Haider: It’s interesting. When I speak with board members, one question that often comes up is, “How exactly do you define geopolitical risk?” In the survey we conducted, it’s a stand-alone topic, but if I were to look at every item—be it growth, be it innovation, be it tech trends, be it people—there is a geopolitical element to any one of those. If we think of geopolitics as a stand-alone topic, it doesn’t surprise me. But if we realize that this is an issue that is an infused element of each of those points, then perhaps it’s surprising because you can easily find it there.

I think part of the reason it’s not a priority is because, what exactly does it mean to have a toolkit to manage geopolitical risk? It is fundamentally a new muscle for many boards, who came of age in a very different era where they weren’t having to think about geopolitical risk, segmentation, and fragmentation.

Sean Brown: Are you seeing any significant changes in terms of how nonexecutive directors, or NEDs, are preparing themselves, and how they are gaining the geopolitical insights?

Frithjof Lund: In terms of how you prepare for this, we do see a lot more attention around formal board trainings for current board directors, but also for the ones who would like to become board directors.

Sean Brown: So how are boards practically managing and structuring geopolitical discussions? How does it work if you have a dedicated unit for geopolitical risk?

Ziad Haider: I think risk and audit committees, in particular, are having to ask themselves, “Do we need to tack on more of these public policy questions into our ambit, or do we need to be coconvening with another committee on these topics?” Or sometimes it’s a stand-alone committee. There’s a bit of a magnifying glass that needs to be taken to the committees on a board and to look at whether they’re actually fit for purpose to deal with the problems that they’re facing.

Ziad Haider: The other piece is, how do you actually want to structure your discussions? What exactly should the board be looking at? And again, I do think that there is a discipline to how the board should be talking about geopolitical risk and its impact. In general, what we see is there are these six dimensions where geopolitics are really hitting an organization: their supply chains—how you think about the level of localization versus maintaining a more global footprint—ownership, R&D, tech stack, capital, people. The question for global companies today really in many ways is, “Can we remain global, and if so, how?” And the “how” is where the board has a critical role to play in terms of helping the leadership think about, at a strategy level, “How do you want to set up and operate along these six dimensions?”

Ziad Haider: Can we talk about the concept of “black swans, gray rhinos, and silver linings” as a way to think about anticipating geopolitical risk?

Ziad Haider: Yes, so we can think about the geopolitical drivers out there in three categories. The black swan events are unknown risks of high impact; the gray rhinos are known risks of high impact; and then the silver linings are about, “What is the opportunity set amid geopolitical volatility?” For a board, it’s quite critical to be able to step back and think about, “What could be these three buckets for us, and how do we want to factor them in, in terms of steering an organization?”

Q: How are companies practically managing and structuring geopolitical discussions?

A: Companies are increasingly setting up dedicated units for geopolitical risk management, with a focus on integrating geopolitical insights with other business functions and maintaining a regular cadence for assessing vulnerabilities and opportunities.

Q: What aspects should boards and CEOs consider to accommodate increased geopolitical risk and complexity?

A: Boards and CEOs should focus on understanding the six dimensions where geopolitics impact an organization, such as supply chains, ownership, R&D, tech stack, capital, and people, and strategize on how to operate globally in a contested world.

In conclusion, managing geopolitical risk is becoming increasingly crucial for corporate boards in navigating the complexities of the global business environment. Boards must prioritize the understanding of geopolitical implications on their organizations and develop strategies to mitigate risks and leverage opportunities. By structuring discussions, preparing NEDs, and anticipating risks through frameworks like “black swans, gray rhinos, and silver linings,” boards can enhance their ability to provide effective oversight and guidance to their companies.