Mundo #25 - The expansion of political risk
G’day, and welcome to edition 25 of Mundo, in its new home on Substack! I’ve moved Mundo to this new platform as its readership continues to expand (thank you), and to launch The China Signal, Mundo’s sibling, which focuses on China in Latin America. You can still access this and previous editions of both of these newsletters on my website.
This week I dive a little deeper into the field of political risk, how businesses are impacted by it, and how their political risk exposure is always evolving. I chat with former ambassador Nigel Gould-Davies, an expert on the subject and author of “Tectonic Politics”. I then detail ExxonMobil’s current troubles from shareholder activists, and how their mismanagement of environmental reputational risk contributed to this.
A chat with author and former ambassador Nigel Gould-Davies
Political risk - the impact of politics on business - is often vaguely defined. Political risk books are often conceptually outdated or too narrow in scope, and lack depth on how political risk management is practiced and applied. Nigel Gould-Davies’ book "Tectonic Politics: : Global Political Risk in an Age of Transformation" is an outstanding exception to this, providing a modern analysis of the growing breadth of political risk, particularly from sub-national, civic actors, and a practical set of “hard” and “soft” skills required for good political risk management. After finishing Nigel’s book earlier this year, I reached out to him to chat further.
Throughout the book and our conversation, Nigel emphasised that:
Businesses need to incorporate traditional political risk analysis with political engagement as the third pillar of a successful business, complimenting "engineers", the producers of a firm's goods and services, and "commercialists", who market and sell these products.
As the third pillar of a business, political engagers shouldn't operate in a silo from the firm's core operations. Nigel argues that political risks are rising, particularly at the societal level in developed economies. Political risk experts must promote their value to the firm's bottom line in this environment through their unique combination of hard analytical and soft relationship skills.
It's not enough to identify political risks that might threaten your firm's operations, nor are these predictions always accurate. Some risks can be mitigated through political risk insurance or avoidance, but engagement with your market's political and civic stakeholders can proactively shape your firm's operating environment.
This is "corporate diplomacy", and there are many lessons and skills from government diplomacy that can be applied to corporate settings. Analysing diplomatic case studies is valuable, as is hiring people with tangible diplomatic experience.
The impact of political risk is everywhere
A 2019 report from EY’s Geostrategic Business Group highlights how broadly political risk can impact a business across “sales, production and operation, research and development, security, finance, regulatory compliance, governance, and reputation.”
Across these areas, there are a number of high profile examples we’ve seen recently:
Sales - China’s expanding trade war on Australian exports have harmed the sale of Australian wine, lobsters, barley, beef and timber, with fears that China may now be restricting imports of iron ore and coal, Australia’s most valuable China export.
Production and Operation - The Trump Administration’s forced sale of TikTok (see Mundo #21) has headlined a decline in Chinese FDI and M&A activity in the U.S. tech sector.
Research and Development - The ongoing concerns of western technology firms to operate in China after a history of intellectual property theft.
Reputation - The heavy fallout mining firm Rio Tinto suffered after destroying a sacred indigenous site in Western Australia’s Pilbara region. A recent Australian parliamentary inquiry recommended tightening the review process for mining firms developing areas adjacent to indigenous heritage sites.
ExxonMobil - The cost of failing to adapt to evolving political risks
Energy giant ExxonMobil, a legacy firm of John D. Rockefeller’s Standard Oil, benefited from an early appreciation of political risk engagement. However recently, it’s reputation and share price has suffered for failing to navigate its expanding political risk exposure to investors and civil society increasingly critical of their perceived disinterest in transitioning to cleaner, lower emission energy.
Standard Oil, standard political risk
As Rockefeller’s Standard Oil, the firm navigated its state-level political risk exposure across the globe (side note: Scott Anderson’s Lawrence in Arabia is a ripping account of Standard Oil’s political meddling in the Middle East in World War I). The firm’s political engagement with foreign governments was often controversial, particularly when they took action to benefit their shareholders at the the expense of U.S. government and global public interests. The firm’s political engagement saw them nimbly avoid embargoes, form local operation and production partnerships to curry favour with governments, and protect their assets with stringent security protocols in hostile environments.
While ExxonMobil’s business dealings with authoritarian regimes drew the ire of human rights activists and the frustration of the U.S. State Department, ExxonMobil’s former CEO Rex Tillerson was unapologetic for his pursuit of profit as the firm’s chief “corporate diplomat”. Donald Trump cited Rex Tillerson’s experience leading ExxonMobil’s dealings in Russia and the Middle East as a key factor in appointing him as his first Secretary of State in 2017.
Yet recently, the firm has faced a growing backlash for their attitude to fossil fuel emissions, caught out by their broadening political risk exposure to Environmental, Social, and Governance (“ESG”) concerns from investors, governments, and civil society. This was led by the newly formed entity “Engine No 1” in a letter to ExxonMobil on December 7. Although the entity reportedly only owns USD $40 million of Exxon’s stock against its total market capitalisation of $185 billion, it quickly attracted the support of other investors such as California State Teachers’ Retirement System, which holds roughly $300 million, the Church of England’s investment fund, and DE Shaw. It’s tapped into discontent over Exxon’s direction amongst its broader investor base.
Exxon’s reputation with clean energy contrasts with high profile commitments by European competitors like BP to lower their carbon footprint and shift their focus to clean energy. ExxonMobil’s strategy was perceived as out of touch with a critical consensus of influential actors. I emphasise perception because the stated future direction of these energy firms are only promises, whose authenticity hangs on their broader credibility.
This is having a real cost. In combination with other factors such as low oil prices, high spending, and an inability to cover its dividend with its cash flow, Exxon’s share price has tumbled by over 35% this year. There are a number of reasons why investors are frustrated with Exxon, but it’s the company’s ESG exposure that’s binding an otherwise disparate group of activist investors together to make changes at Exxon’s board.
A history of antipathy to clean energy reduced ExxonMobil’s credibility in the eyes of this growing coalition of ESG-focused investors and actors, that is proving difficult to change. When the firm’s CEO Darren Woods announced plans for “meaningful near-term emissions reductions” on Monday to placate activists, shares dropped another 4%.
I highly recommend “Tectonic Politics” to anyone eager to dive deeper into the field of political risk, beyond the ambiguous and often outdated guidance that other books offer.
Nigel and his colleagues at the International Institute for Strategic Studies provide a great overview of the need for a broad, corporate "foreign policy" integrated across the firm in a recent podcast.
Nigel is a former British Ambassador to Belarus, with a prior stint in Moscow. His area of expertise is timely, and I'd recommend you follow his Twitter feed and his frequent publications for up-to-date analysis on the region.
Who else would you like to see interviewed for Mundo?
Thanks to everyone who has emailed me with their thoughts and ideas. Keep them coming!
Forward this along to others who might find this an interesting read.
Stay calm, think of others, stay healthy.