Political Uncertainty: 3 Trends Driving Heightened Concerns for Boards

Annie Kors
The following blog series was excerpted/summarized from the latest Diligent Institute report, Governing Through the Fog: Corporate Director Perspectives on Political Uncertainty. The Diligent Institute is a separate think tank and research arm that tackles governance issues through a global lens. For more information and research from the Diligent Institute, please visit the website.


The Diligent Institute Tackles Political Uncertainty in the Boardroom

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[/caption] Today, the global political environment feels more volatile and uncertain than it has been for several decades, and many boards are unsure of how to understand and approach it. In recent research conducted by the Diligent Institute, directors were asked about the topics that are most demanding their attention. 'Political uncertainty' rose to the top of a list of concerns mentioned most frequently by directors around the world. In response, the Diligent Institute sought to tackle this thorny topic in a recent report, 'Governing Through the Fog: Corporate Director Perspectives on Political Uncertainty,' prioritizing three key questions:
  1. What makes political uncertainty different, and possibly harder to handle, now than in the past?
  2. Is managing political uncertainty different from managing other kinds of risks, and if so, how?
  3. And finally, what should boards do about political uncertainty?
In order to answer these questions, the Diligent Institute conducted interviews with non-executive directors from public/listed and private companies and C-suite professionals with significant board experience. Most of our respondents serve on three or more boards and/or have international experience.

What Makes Political Uncertainty So Hard for Boards to Handle?

Companies have dealt with political uncertainty for as long as governments have influenced businesses. Yet, directors feel that something has shifted and now political risk has risen to the top of a long list of areas of risk demanding increasing amounts of directors' focus and time. Below are just a few of the trends explored in the full report:

1. Trump-Era Politics: 'Less Predictability' Means Greater Uncertainty

Many directors point to the November 2016 election as a key milestone on the road to today's heightened levels of political uncertainty. Actions taken by the Trump administration are highly unpredictable, reflecting broader global and nationalist unrest. As on director put it:
'There was a reasonably acknowledged set of actors on the stage ' Republicans, Democrats, lobbyists, industries ' in a somewhat comfortable choreography working together and against each other, then you wake up and there's been a thunderstorm on the stage and rearranged who the characters are. It just creates less predictability.' ' Board Member, "Governing Through the Fog" report
Arguably, 'less predictability' is why many supporters of Trump voted for him after all ' they wanted a drastic alteration in the way politics and global systems operate, in who those systems favor and support, and in whose voices counted in influencing the systems. Meanwhile, US voters aren't the only ones feeling that way. Several months prior to the US election, the passage of the UK's resolution to exit the European Union, otherwise known as Brexit, was similarly unexpected and buoyed by closely aligned forces.
'Globalization and liberalization were seen as a one-way street ' in the 1990s it seemed obvious that international global capitalism had won out and migration would become increasingly relatively free, that everyone would eventually converge on that model and it was just a question of the speed of conversion. A lot of business leaders believed in that one-way street.' ' Board Member, "Governing Through the Fog" report
A UK-based director narrowed down the point, 'I think part of the backlash was not against globalism itself, but against the people who've taken the bulk of the population for granted, that same population that isn't feeling the benefits. Backlash against globalism itself takes it a step too far.' The deviation from, or reversal of, a trajectory towards increasing globalism and capitalism that Trump and Brexit represent explains in large part why the political landscape feels more uncertain than ever for companies and their boards of directors. This is true both because of the substance of the shift, and because the subversion of expectations made business leaders lose faith in predictive political tools. The models that business leaders and corporations have relied on for so long are being challenged, and that makes this moment of political uncertainty particularly upsetting and distressing to boards of directors.

2. The Pace of Digital Communication Demands Immediate Attention

Potentially the most significant factor contributing to why political issues have become so much harder for boards to manage is the dramatic increase in the speed of communication. Coupled with the heightened 'political awareness' among stakeholders, the speed of information today has also changed the way companies react to political issues. When companies are forced to respond immediately, it puts additional pressure on boards, especially those boards that are used to a more deliberate pace. Additionally, social media has impacted the level of scrutiny that directors are under ' which has dramatically increased in the past three years.
'The speed of communications means everything in understanding why political uncertainty is harder to manage now. The last time I remember really serious political uncertainty, the situation played out over the course of days, not hours. So social media, and the constant connectedness of everyone, means that everything gets crammed into a very short period of time and you don't have long to respond.' ' Board Member, "Governing Through the Fog" report

3. Today's Boards Receive Greater Scrutiny, with Public Commentary

The pervasiveness of politics is another contributing factor making this issue a difficult topic for directors to handle. A director on several boards in the retail sector explained:
'Political uncertainty has become harder to manage even in the last year or so because you can't silo the political issues anymore ' they impact so many other things. And any one of these issues can really impact companies on a global level.' ' Board Member, "Governing Through the Fog" report
The viral nature of political issues makes directors' responses particularly risky. It also means that even more board conversations involve political dimensions, including discussions that previously might have been seen as strictly about financial performance or investment decisions.' Increased expectations around ESG (Environmental, Social, and Governance) issues are prompting boards to expand the list of topics they address in the boardroom. A director in the insurance sector describes the phenomenon: 'We have a generation now that wants companies to do something different, [who] believes they should be ethical companies as well as companies that produce and sell goods and services. It isn't just about maximizing profits, which came out of the shareholder value model. People want to open up the debate about different objectives and are explicitly getting investment managers involved in saying 'prove that what you do has a social purpose as part of your business model.'' All of this means that boards are increasingly tangled up in issues with political underpinnings, which makes boards and their businesses feel the impact of political uncertainty even more keenly.
Read Blog 2: How Does Political Uncertainty Differ from Other Board-Level Risks?
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Annie Kors
Annie Kors is the Lead Researcher for Diligent Institute and author of Winds of Change: Environmental Sustainability Rises to the Board Level. She conducts global research on the complex topics facing boards of directors. Diligent Institute is the internal think-tank and research arm of Diligent Corporation, and all of its reports are publicly available online.