In a sense, the shift recalls the early days of corporations, when they were chartered by the state to assist in implementing public policy and producing public goods. This challenges the market-driven paradigms that underlie our current corporate governance standards. How should corporations adapt to this new reality?
As with ESG issues, corporations find themselves in an uncertain and largely reactive mode. However, in contrast to the bitter partisan debates about environmental, social and governance (ESG) issues – whether corporations should be held to account for the negative externalities of their operations and pursue objectives beyond short-term wealth maximization – there is typically broad domestic support for compelling corporations to address perceived threats to global security and rules-based international orders.
Are corporate boards adequately prepared for the role they are expected to play in an era of deglobalization? A recent survey of internal auditors in Europe reported a gap between geopolitical uncertainty as a risk priority and the corporate resources dedicated to addressing it.
How many boards identify geopolitics as a requisite skill set for senior management and their boards? Unlike cybersecurity risk management, corporations have no mandated disclosure requirements for managing geopolitical risk factors. Few currently disclose where oversight responsibilities for geopolitical risk have been assigned within the organization and how they are assessed and managed.
Responding to geopolitical risks is becoming part of the evolving template for seeking judicial remedies. Under corporate law, directors and officers may be held liable for failing to monitor a company’s “mission critical” risks. The risks described above meet this threshold. Likewise, they increasingly rise to the level of “materiality” that triggers public disclosure requirements under securities laws. In any event, and as we’ve seen in connection with the ESG movement, companies need to address reputational resilience by clarifying their interactions with geopolitically sensitive issues and markets.