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Derek Smith: Managing Political Risk Is Everyone’S Business

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Derek Smith

IT IS often difficult to predict and manage political risk due to its unpredictable nature and difficulties in measuring it. Political risk is traditionally measured by a variety of factors, including electoral uncertainty, conflict risk, social unrest, corruption, political instability, the quality of the institutions in the host country, sovereign debt default risk and market imperfections. These are all objective measures. Notwithstanding the above, Johnson and Tverskys’ (1983) behavioural studies have proven that executives’ perceptions, which are subjective in nature, impact their willingness and decisions to invest or reinvest in countries.

Researchers Cason and Lopes explain: “Typically, political risk is defined as an unexpected change in ‘rules of the game’ by host-country governments that may negatively affect business operations.” There has been extensive research surrounding the impact of political risk in developing economies versus advanced economies. Whether a nation’s economy is considered developing or advanced, one point is constant: the type of economy does not exempt an organisation from changing external/macroeconomic factors.

As the general election on September 16, 2021, looms large, multinational investors, local investors, budding entrepreneurs, entrepreneurs and, most importantly, voters are paying special attention to promises and past records of political parties. Promises and records on delivery are key factors involved in the expectation and management of political risks.

In the first of a two-part series, I offered three key recommendations from a corporate perspective, including strategically planning for political risks, building company resilience and responding to political risks. In this, the final article of that series, I will briefly touch on how business and personal decisions are affected by responsible or irresponsible governance.

S.M.A.R.T. Promises

This is an adaptation from Specific, Measurable, Attainable, Realistic and Timely goals. Every level of the investor will - and must - consider promises articulated in the political party’s plans and determine whether those promises are SMART. Also, they will consider their company’s goals and strategies in relation to these plans. Moreover, how does the company’s corporate culture align with the promises made in the political party’s promises? Taking the above factors into account impacts when, how, and even where they will invest – or not invest.

Similarly, voters must complete a similar assessment in order to make well-informed plans for their personal opportunities. What must be considered in personal assessments is how your vote impacts social unrest, corruption levels and the type of economy you wish to have post-September 16, 2021.

Politics (political cues) impact your position

Law and order in society is enacted, implemented and enforced by the political system, enabling choices and opportunities for the electorate directly or indirectly. Thus the electorate may wish for proper functioning political systems (responsible governance) because they determine their freedoms and what they can strive for, regardless of ideology or affiliation. Gamlin, Donf, Labroo, & Robinson (2019) claim that people prefer utilitarian products (promises that benefit the majority), and salient political cues play a prominent role in explaining these preferences.

Ambiguity and vague communication by governments negatively impacts investor confidence and the electorate’s belief in a government to deliver on promises. Also, a 2018 Transparency International Global Corruption Barometer found that 80 percent of Bahamians consider corruption in government as an important issue. It is a topic that cannot be escaped or brushed aside by simply not addressing it. Corruption is the act of investing in projects that will benefit society but profit only a few individuals and their allies. Moreover, irrespective of what drives corruption, it negatively impacts the growth prospect of a country.

This uncertainty could deter foreign direct investment (FDI) and local risk-taking by the electorate.

Conclusion

In short, it is against this backdrop that political parties must be responsible in their promises and plans for governance. Political risk management is every stakeholder’s business.

NB: Derek Smith Jr. has been a governance, risk and compliance professional for more than 20 years. His career includes positions at a TerraLex member law firm, a Wolfsburg Group member bank and a ‘big four’ accounting firm. MrmSmith is a certified anti-money laundering specialist (CAMS) and the Compliance Officer and MLRO (money laundering reporting officer) for CG Atlantic’s family of companies (member of Coralisle Group) for The Bahamas and Turks & Caicos.

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