Anticipating
and planning for
geopolitical and
regulatory changes
Introduction
Late in 2017, the EY Center for Board Matters highlighted the
importance of anticipating and planning for geopolitical and
regulatory changes in our report, Top priorities for US boards in
2018. That priority has since intensified. In the first few months
of 2018, US stock indexes experienced the highest levels of
volatility since 2014. Long-standing trade agreements, tax and
regulatory systems, and defense treaties are being renegotiated,
transformed or absolved. And the International Monetary
Fund has warned that rising US-China trade restrictions are
threatening to derail growth and undermine confidence.
Rising geopolitical tensions and increasing electoral share
for populist parties are a concern for businesses. With policy
becoming harder to predict, many executives see policy
uncertainty, geopolitical tensions, and changes in trade policy
and protectionism as key risks to their business. At the same
time, business leaders are optimistic about the near-term US
outlook — in part because of deregulation and the passage
of US tax reform. In fact, the recent Borders vs. Barriers
report from EY, Zurich Insurance and the Atlantic Council
indicates that despite concerns about policies restricting their
ability to transport goods and raise capital, global CFOs are
overwhelmingly bullish on investing in the US, and 71% expect
continued improvement in the US business environment in the
next one to three years.
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These dynamics underscore the need for companies to proactively
address strategic opportunities and risks stemming from geopolitical
and regulatory changes. For the board to provide effective oversight in
this area, it is imperative that directors understand the geopolitical and
regulatory landscape and how relevant developments are identified
and evaluated within their companies’ strategy setting process and
Enterprise Risk Management (ERM) framework. Boards should also
consider whether they have access to the right information and
expertise to effectively oversee this space.
Q: What do you believe to be the greatest near-term
risk to the growth of your core business?
Political uncertainty
48%
Geopolitical tensions
43%
Changes in trade policy and protectionism
36%
Disruptive forces
36%
Currency movements
35%
Global Capital Confidence Barometer, April 2018, EY
May 2018
Anticipating and planning for geopolitical and regulatory changes
Examining the complexity of geopolitics
The term “geopolitics” encompasses a broad range of frequently
interconnecting issues, including:
• Global economics
• Regulatory and tax legislative matters
• Financial and supplier market uncertainty
• Commodity constraints and pricing
• Exchange rate fluctuations, including monetary policies
• Civil and workforce disruption
• Diplomacy and security
A PESTLE (i.e., political, economic, social, technological, legal
and environmental) analysis, described further below, coupled
with a comprehensive ERM framework, can help steer companies
towards identifying the geopolitical threats and opportunities
most relevant to their strategy, operations, financial
performance and regulatory compliance.
Because geopolitical issues are complex and can be
unpredictable, it is tempting to see geopolitics as impossible to
prepare and plan for or control. While the fundamental nature of
geopolitics can be volatile, most organizations understand that
geopolitics are not a problem to solve but an external business
force that must be understood and managed. The board should
set the tone for confronting the challenge.
Understanding management’s framework
for analyzing and managing geopolitical
threats and opportunities
Generally speaking, the way companies assess and respond to
geopolitical and regulatory developments is continually evolving,
and each company likely has a bespoke approach. But given
increased complexity and growing uncertainty, organizations
should consider a more deliberate approach to better understand
and incorporate these risks and opportunities into their strategy
setting and risk management process.
For the board, it is critical to understand management’s approach
to addressing potential geopolitical and regulatory impacts,
which at its core should involve a process for understanding,
preparing and acting.
Understand
Addressing geopolitical and regulatory developments requires
that companies recognize the full universe of geopolitical and
regulatory forces, as well as the likelihood of those forces coming
to life, that can meaningfully affect their business and have a
disciplined approach to assessing such exposures. This includes
geopolitical shifts that can impact revenue drivers for the
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organization based on its current global footprint (e.g., trade
barriers, tax policies), as well as any potential new or alternative
markets for expansion. Companies should consider potential
impacts to their supply chain (e.g., how trade agreements or
military conflicts could impact operations), human capital (e.g., how
immigration laws may affect the company’s ability to attract and
retain talent), corporate functions (e.g., how changes in regulations
may change the cost of capital) and stakeholders (e.g., the social
and environmental impacts on communities in which the company
operates). Without a comprehensive and prioritized review of
all reasonable sources of potential geopolitical and regulatory
impacts, some critical risks or opportunities may get overlooked.
A commonly used tool that organizations have used to
better capture and screen the macro-environment facing the
organization is a PESTLE analysis, which the COSO 2017 ERM
Framework Update offers as an approach to categorizing and
analyzing the external business environment. Using the PESTLE
framework can allow companies to better identify how external
forces and potential changes in the regulatory landscape may
impact market growth, business strategies, current and future
operating performance, and regulatory compliance. The results
of the PESTLE analysis can then be used to determine the
threats and opportunities that can be incorporated into a SWOT
(strengths, weaknesses, opportunities and threats) analysis, which
can further help organizations assess their internal capabilities
(i.e., strengths and weaknesses) relative to the external
environment (i.e., opportunities and threats).
Many companies perform a PESTLE analysis in advance of
setting strategy, with the goal of having the strategy itself
informed by external factors. Risks and opportunities identified
through the PESTLE framework can change rapidly, requiring a
dynamic process for monitoring, communicating and updating
an organization’s risk profile. Monitoring threat levels for many
geopolitical and regulatory related risks may require deep
trend analysis (e.g., trends and predictive indicators identified
through data analytics, including social media metrics), tracking
of complex leading or lagging indicators (e.g., macroeconomics)
and qualitative and quantitative business intelligence reporting.
Management should also explore deeper underlying trends
(including the speed at which trends are evolving) that can help
anticipate and explain certain geopolitical events (e.g., mid-
term change in government) and regulatory developments.
Key indicators should also be identified and tracked to monitor
for changes that could invalidate the company’s underlying
strategic assumptions, or that could open up new strategic
opportunities or prospects.
It can be valuable for the board to review the geopolitical and
regulatory factors identified by management as potentially
relevant and provide input. With its independent perspective and
unique combination of expertise, the board can help challenge
May 2018
Anticipating and planning for geopolitical and regulatory changes

management to fully understand the risks embedded in their incorporate relevant changes to the company’s strategy and the
business strategies and uncover potential opportunities in the company’s global footprint. It should also include external expertise
changing geopolitical landscape. as appropriate.

Prepare It is important that the assessment process take into consideration

Once the sources of geopolitical and regulatory risks or
opportunities have been identified, management needs to
assess possible scenarios, including the potential impact, the
time frame to realization of the impact and the likelihood of the
change occurring. The assessment needs to bring into focus and
highlight the key issues, and should also inform a revisit of the
company’s strategy. Is the company willing to accept these risk
exposures with respect to the business strategy? Is the company
well-positioned to capitalize on potential opportunities? Is the
company effectively monitoring signposts for increasing and
decreasing risk? This assessment process should be revisited to
company culture and the interests of its stakeholders, including, for
example, investors, employees, consumers and the communities
in which the company operates. Taking advantage of opportunities
presented by geopolitical or regulatory changes may create
consequences that can impact the company’s relationships with key
stakeholders, its reputation and even its social license to operate.
It is important that the
assessment process take into
consideration company culture and
the interests of its stakeholders.

The PESTLE analysis framework

Categories1 Considerations and implications1

Political • What are the critical political factors and developments? What are the expected changes and implications from
pending elections or electoral results?
• What is the nature and extent of government intervention and influence?
• Developments to consider include: governmental stability, taxes and taxation policies, intergovernmental cooperation,
government expenditure levels, foreign trade relations (balance of trade between countries, trade restrictions, tariffs)

Economic • What is the current and projected economic environment?

• Would market diversification offer stability in the company’s growth and performance?
• Are there significant barriers to entry?
• Developments to consider include: monetary policy (interest rates), fiscal policy, inflation, foreign exchange rates,
availability of credit, GDP growth, growth of developing economies, unemployment rates, labor supply and wage rates

Social • What cultural aspects, demographic and consumer trends are important and how are they evolving?
• Developments to consider include: customer needs or expectations, population demographics
(e.g., age, education levels, distribution of wealth), changes in lifestyles and trends

Technological • What technological innovations are emerging and how will these impact the company and society at large?
• Is the company able to sustain quality in its product or service delivery?
• Are there opportunities to enhance the company’s management systems to better support various business processes?
• Developments to consider include: R&D activity, automation and technology incentives, rate of technological change or
disruption, speed of transfer, innovation

Legal • What current, impending and proposed legislation could impact the company and its industry?
• Is the rule of law enforced?
• Developments to consider include: laws (data protection and privacy, employment, contract, consumer, health and safety),
regulations, industry standards

Environmental • What are the environmental and ethical considerations?

• Developments to consider include: natural or human-caused catastrophes, ethical and fair business
practices in local jurisdictions, ongoing climate change, changes in energy consumption regulations,
waste disposal standards, attitudes toward the environment, other sustainability matters

1
Adapted from COSO 2017 ERM Framework Update

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Anticipating and planning for geopolitical and regulatory changes

Act
Once risks and opportunities have been identified and assessed, Exercising influence
companies can respond by either accepting, mitigating,
Some companies may seek to proactively influence political
eliminating or transferring the risk, or strategically pivoting
and regulatory developments, including working through
to seize opportunities — all while avoiding knee-jerk reactions.
trade organizations and industry groups, engaging with
Companies need to create and evaluate their options for
stakeholders and policymakers at the local and national
addressing various scenarios that may result and integrate the
level, identifying and building relationships with political
responses into their business strategy to build resiliency. In other
champions (and opponents) and advocating for policy
words, companies need a geostrategy that positions them to
approaches that serve the company’s interest. Leading
navigate uncertainty with predictable contingency plans that
practice includes developing a holistic political perspective
harness opportunity and minimize risk.
by systematically tracking macro indicators and
Contingency planning for geopolitical factors should focus on establishing a robust public policy strategy that is aligned
designing and testing responsive controls. These may include a with the company’s position on key issues and risk profile.
range of stress-test exercises, including tabletops, quarantines Most importantly, companies seeking to proactively
and any number of resiliency plans, such as rapid deployment of shape the geopolitical risk landscape through lobbying
assets, capabilities, lines of credit and so forth. In volatile regions, and/or political spending should understand the financial
companies should establish alternative operational measures to and reputational risks connected to such expenditures,
employ in the event of unrest. especially in today’s fractious and divisive political
climate. Such spending may be subject to scrutiny by
It is important for companies to recognize that, as revealed time
some investors, consumers and other stakeholders.
and again in recent global developments, political forecasting
is not always reliable, and responsive testing should account
for a wide range of scenarios, including the long shot. While we
can’t predict the future, a response is generally easier to predict.
Focusing on people and processes and creating an open culture
of flexibility and resiliency is key. Management should also have a
process in place to conduct postmortems and “lessons learned”
analyses over a prior relevant time range to assess what was
missed and how well the company responded.

The board’s role in overseeing geopolitical risks and opportunities

Understand how geopolitics impact the Cultivate board competency

organization’s strategy and operations and readiness

Oversee identification of Assess skill sets and experience of board members;

relevant geopolitical factors consider global, government, policy, military experience

Understand how potential geopolitical and regulatory Provide for appropriate committee structures
shifts could impact strategy and risk management and assign oversight responsibility

Enhance board expertise through third-party

Oversee management’s scenario planning and resiliency plans
consultants and specialists, as appropriate

Review postmortems and process Regularly assess whether the board’s access to information
for applying lessons learned and reporting from management is sufficient

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Anticipating and planning for geopolitical and regulatory changes
How can boards better cultivate competency
and readiness around geopolitics?
As a starting point, boards need to make sure they have the right
people in the boardroom to effectively oversee the geopolitical
risks and opportunities facing the company. For some boards,
that may mean having a director with specific regulatory or
public policy expertise, or expertise relevant to volatile regions or
markets where the company operates or is planning on operating
in the future. For others, it means consulting with an expert on
relevant topics.
Boards also need to consider their process for getting information
and staying current on how the geopolitical and regulatory
landscape is evolving relative to the company’s strategy, critical
assumptions, and its operations and regulatory compliance. It is
important that boards are being updated from the appropriate
individuals from the senior management team who are
knowledgeable about the geopolitical environment and can
provide the board with timely, valuable information in a manner
that facilitates rich dialogue. Boards also need to have more
exposure to external viewpoints to provide that the board has
the competency to challenge management and offer informed
input. Boards and management need to be open to differing
interpretations of events and trends, and attention must be paid
to the optionality value associated with investing in projects in
politically risky geographies and business ventures.
Overall, the reality is that even with all the planning in the world,
companies may still miss a key geopolitical risk or opportunity —
particularly in today’s environment of shifting and unexpected
political outcomes. But that should not paralyze management
teams or boards from capitalizing on key strategic opportunities.
As with other priorities on the board agenda, having a board and
management team that are well aware of the external business
context, deeply understand the company’s strategy and the
assumptions underpinning that strategy, and can be nimble when
executing strategic pivots is key to weathering any black swan
event and creating long-term value.
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Questions for the board to consider
• Are geopolitical and regulatory opportunities
and risks considered as part of the strategy
setting process and embedded into the company’s
risk management process and controls?
• Does the management team utilize a robust
framework to identify and assess relevant
geopolitical and regulatory factors?
• Does the board have complete visibility around the potential
geopolitical and regulatory impacts that the company
faces? Is the company approaching such impacts only
from an “event” lens or as part of a broader sociopolitical
analysis that is updated with dynamic, holistic monitoring?
• Does the board understand management’s process
for mitigating geopolitical and regulatory risk
through scenario analysis and stress testing?
• If shifting geopolitical or regulatory risks challenges
management’s critical risk assumptions, is the
company prepared to effect a strategic pivot? And
has the board reviewed and provided input?
• For operations in high-risk jurisdictions, does the
organization have robust processes and controls to protect
against bribery and corruption? And does management
have sufficient understanding of the geopolitical and
psychological drivers and enablers of corrupt behaviors as
well as controls to prevent and mitigate such behaviors?
• Does the board have the right directors, committee structure
and access to information to oversee key geopolitical
and regulatory risks — and to challenge management?
May 2018
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