simulating political risk

"Basing global investment decisions on economic data without understanding the political context is like basing nutrition decisions on calorie counts without examining the list of ingredients."

- Ian Bremmer , Harvard Business Review, June, 2005

Effectively managing political risk is a critical component of globalization. While most companies analyze a country pretty thoroughly before investing, ongoing monitoring often goes neglected. Companies with huge capital assets, such as energy companies, have learned the hard way to continuously monitor the political situation. But with the recent surge towards globalization, many companies are underestimating their risk, so are not putting much effort into monitoring ongoing political risk. It's easy to define risk too narrowly, and think that if you're not building expensive manufacturing plants, you don't have to worry if industry is nationalized or if a new government turns against foreign investment.

Yahoo certainly has a different set of risks to consider than Chevron, when moving into a new market. While Chevron can lose substantial capital assets and production capacity, Yahoo must determine risks to their corporate image. If a new regime turns against foreign investment, Chevron may lose their plant, and possibly endanger the safety of their workers in the case of riots or violence. In the same situation, Yahoo may deal with severe morale issues, which could lead to sabotage or brand erosion.

Since the level of risk is not the same, Yahoo clearly does not need to monitor political risk as closely as Chevron. But not monitoring risk adequately means missing signs of political collapse, or economic expansion -- threats or opportunities which comprise a critical competitive advantage. Globalization is yet another form of operational effectiveness, a game in which no one wins, as margins get slimmer and slimmer. Everyone must play the game in order to keep up, necessitating quick reactions to events and opportunities. Benchmarking means we're only going to do as well as our competitors, after all.

Analyzing the interrelationships of political risk reminds me of Sim City, where I learned that I can make my people happy by taxing them less, through underfunding my fire department. But when their houses catch on fire and the fire department is too slow to reach them, they don't stay happy for long. I'd love to see an off-the-shelf political risk simulation. Sim Cuba: where you have 27 different potential scenarios for how things will shake out with Castro. Slide a control bar with international engagement on one end and isolationism on the other. Hold elections? Fixed or fair? Of course, by the time you finish building your model, your data is outdated.... But this would allow a company to analyze a political situation solely in the light of their own interests and risk factors, to determine the most likely scenarios, and map the results to their corporate risk profile, to determine whether further investment is appropriate, or if you should pack up and flee for your life.

I love the idea of moving such Monte Carlo simulations out of the hands of experts and into the hands of those who need them. Top notch economists and political analysts keep thousands of interrelationships in their heads, and ultimately, that knowledge is lost to the grave. How fantastic to move all those rules into a hypercomplex model, and replace some of the art with mathematics?

We can't be more than five years away from such a tool -- business will demand it.

the inherent value of core values

I've run a few marathons in the past, but I was never what anyone would consider "competitive." My 6+ hours finishing time never gave the leaders anything to worry about. However, I could not help but be fascinated by what it must feel like to be that kind of runner. I've paced my bicycle trips, and realized that I bike as fast as elite runners run, and I honestly can't fathom being able to run that fast. When no one's around in an airport, I'll run on the moving walkway just to try to feel what it feels like to run like that.

The other unfathomable bit about being an elite runner: I can't imagine what it must feel like to be running down the street, and no one's in front of you. Every once in a blue moon, you hear of a runner at the head of the pack who took a wrong turn. Race organizers try to prevent that from happening, but as a leader, how do you have the confidence that you're going the right way? How do you know that there are thousands of people behind you, following you? Turning back to look is not an option -- you have to just believe that you're doing the right thing, moving in the right direction. You just hope that if you're not, you don't get too far before figuring it out.

Sometimes leadership is like that.

The role of a leader has changed a lot in the past few decades. We work much more collaboratively than before, to get buy-in, rather than the old autocratic style. However, in times of crisis, a leader may not have that luxury. If you think back on times of personal or professional crisis, you may realize that you were like that elite runner, acting decisively. In the back of your mind you hoped you were making the right decision, but you knew that above all you needed to rise to the challenge -- to act.

Moving boldly like this means you're probably outside of your comfort zone. You're doing something because it's important, because it feels right. For that, you rely on your core values. I used to think core values exercises at companies were nothing but HR fluff, but a few recent experiences have shown me that organizations without defined core values will fluctuate with each new leader. It's a lot like traveling without a strategy. I can take care of individual opportunities that present themselves, but how can I be sure that I'm moving in the right direction?

Core values are the things you believe in so strongly, that you’re willing to follow them even if they will cause you to lose your job, or drive your company out of business. Our values give us strength and wisdom to make crisis decisions. Yes, we want to rely on rationality, but there will always be more data to analyze. In a crisis, you may have no choice but to be that runner out front, praying he's going in the right direction, and running as hard as he can. Knowing you're doing the right thing, because it's in alignment with your values, will keep you from stumbling.

Perhaps more concretely, you must have a firm grasp on your core values in order to have good governance in your organization. However, I've been hearing about core values for the past decade, and had always dismissed them as fluff. Why? Because organizations adopted core values, but didn't actually live them. If you say you stand for integrity, but don't see that integrity governs the relationships that the company has with employees and customers, that disconnect will be painfully obvious, and the exercise fruitless.