Multinationals must pay closer attention to geopolitical risk if they are to avoid the reputational fallout from doing business in countries whose authorities commit human rights violations and other breaches of international law.
Sanctions and other regulatory hazards have long been a big concern of companies operating in volatile emerging and developing markets. But while the risk of falling foul of economic restrictions continues to be a major reason for companies exiting countries isolated by the West, the reputational damage they may face is becoming an ever more important consideration.
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The reputational damage multinationals may face is becoming an ever more important consideration.
According to research by the Yale School of Management, since the invasion of Ukraine, more than 1000 companies have voluntarily curtailed operations in Russia beyond the bare minimum legally required by international sanctions. Public pressure to disengage appears to have been key: nearly half of respondents to the 2022 Edelman Trust Barometer’s global survey said they buy or boycott brands based on the company’s response to the invasion.
International incidents
In recent years, reputational hazards have also loomed large in other parts of the world. For example, in Saudi Arabia — against a backdrop of international outrage over the assassination of Saudi journalist Jamal Khashoggi — some top business leaders pulled out of a major Saudi investment conference, while others cut business ties with the country. In 2019, Hong Kong-based global brands faced rebuke from democracy activists during the unrest there. In Myanmar, after a military coup, international firms came under shareholder pressure to sever links with the junta, while European clothing retailers suspended orders from Myanmar’s factories.
The US government typically warns American companies of the compliance and reputational risks of doing business in certain jurisdictions. Following the military coup in Sudan in 2021, for instance, it issued a statement that focused on the latter, specifically in relation to transactions with companies owned by the state or the military.
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Such concerns have become much more pronounced because international companies have increasingly found themselves operating in undemocratic, unstable countries, with their presence in these jurisdictions coming under greater scrutiny. Countries of operation are today more prone to volatility and authoritarianism as democracy globally comes under geopolitical stress from regional competition, worsening governance standards and socioeconomic conditions, and crises caused by climate events.
Demands for greater corporate accountability have also grown, with the emergence of strident activist consumers and investors employing social media to call out unethical business practices.
In the past, firms facing criticism over their business operations might have sought to mitigate its impact through robust crisis communication strategies and messaging, to give corporate decision-makers sufficient time to carefully consider their options. However, the wildfire speed at which adverse social media sentiment can now spread means CEOs and board directors can be quickly overwhelmed by reputational threats or damage before they have a chance even to examine remedial actions.
Reactive approach
A 2021 EY survey of global executives found that boards seem to have a reactive approach to political risk management. Clearly, this should change as by becoming more proactive, boards can minimise the probability of being exposed to crises that can only be addressed by costly operational suspension — and even costlier exit, as in the case of Russia.
Whether entering a new market or an established presence, companies must have the capacity to: determine the risk of possible political, security and economic turmoil; map out how this might unfold and subject them to public censure; and, critically, draw up courses of action that seek to protect their brand.
But such in-house expertise must be equally alert to multinationals’ impact on the countries and regions in which they operate, since many of them are geopolitical actors. Their activities may — inadvertently or otherwise — implicate them in local, regional and international disputes, tarnishing their reputations in the process.
Foreign oil and gas drilling firms have been caught up in maritime sovereignty disputes between the government in Beijing and the littoral states of the South China Sea. Cryptocurrency firms have been warned by the European Central Bank that they run the risk of becoming accomplices to Russian sanctions-busting. Digital-surveillance companies have controversially sold spyware to governments that have employed the tools to snoop on dissidents. And Meta came under scrutiny during Ethiopia’s civil war and post-coup Myanmar when Facebook was used by protagonists to push agendas.
Indeed, the sheer scale and geographic scope of ‘big tech’ social media companies — which often dominate the communications landscape in both emerging markets and advanced economies — means they can face significant pressure in some undemocratic jurisdictions to censor content or share data. Submission to this can also leave firms open to charges of abetting authoritarianism.
As the activities of corporates around the world increasingly come under the spotlight, they need to be more alert to reputational hazards. Improving their geopolitical awareness is key to having a better grasp of developments that elevate these risks. With operational environments becoming more and more volatile, this ability is becoming business-critical.
David Claridge is the CEO of the geopolitical and security intelligence service Dragonfly. A commentator on security and intelligence issues, he holds a PhD in international relations from the University of St Andrews.