Corporate boards face increased complexity today, with heightened geopolitical risk key among the concerns they must consider as they guide the companies they serve. Increasingly, boards are expected to have greater knowledge of geopolitical matters and their potential implications for companies. In this episode of the Inside the Strategy Room podcast, Sean Brown talks with Dominic Barton, who previously served as our global managing partner, Canada’s ambassador to China, chair of Canada’s Advisory Council on Economic Growth, chair of the International Advisory Committee to the president of South Korea on National Future and Vision, and is now board chair of Rio Tinto and LeapFrog Investments and sits on several other boards and advisory boards. Also joining the conversation is Frithjof Lund, a senior partner who leads our board services service line, and Ziad Haider, a partner and global director of geopolitics. This is an edited transcript of their conversation, which was recorded in September 2024. For more discussions on the strategy issues that matter, follow the series on your preferred podcast platform.
Sean Brown: Are boards generally aware of the scope of geopolitical risks they now face? Or do they tend to focus more on macroeconomic factors and other areas like technology?
Frithjof Lund: We do see from some of the board research, in general, that there is a very clear perception of an increasing complexity surrounding boards and the role of boards. This is linked to stakeholder and shareholder complexity; it’s linked to the increasing business complexity; and, of course, we also see increasingly complex market forces linked to macroeconomic changes and geopolitical changes. Interestingly, in our global board survey, less than half of the board directors actually put geopolitical and macroeconomic risks on the board agenda currently. What surprised us even more is that we see a very low proportion of board directors actually say this is a priority topic for their organizations to address. Twenty-five percent say that geopolitical and/or macroeconomic risks are a priority topic, and only 19 percent say that the political risks are a topic.
Ziad Haider: It’s interesting. When I speak with board members, one question that often comes up is, “How exactly do you define geopolitical risk?” In the survey we conducted, it’s a stand-alone topic, but if I were to look at every item—be it growth, be it innovation, be it tech trends, be it people—there is a geopolitical element to any one of those. If we think of geopolitics as a stand-alone topic, it doesn’t surprise me. But if we realize that this is an issue that is an infused element of each of those points, then perhaps it’s surprising because you can easily find it there.
I think part of the reason it’s not a priority is because, what exactly does it mean to have a toolkit to manage geopolitical risk? It is fundamentally a new muscle for many boards, who came of age in a very different era where they weren’t having to think about geopolitical risk, segmentation, and fragmentation.
Sean Brown: Could another factor be that geopolitical matters are something operating executives are more focused on, rather than their board? For example, supply chains have been through a lot of geopolitical pressure in recent years, but that might not always rise to be a board topic.
Ziad Haider: Yes. Look, I think it goes to a broader question about the line between what a board does versus management. We think of a board as helping set strategy, stress testing the strategy, and the leadership team also obviously playing a role in that. I would say, though, that if you take my point that geopolitics finds its way into a strategy conversation or a growth conversation, it’s very hard to think of a board not grappling with this when it thinks about the future of its organization in a world where supply chains are shifting.
But I think the idea of the board investing more in its ability to identify the risks, ask the right questions of the leadership team, stress test the strategy—that ability to do oversight—is premised on a degree of insight. Many boards are realizing that, “Do we actually have the right robust lines of insight to execute on this oversight role as effectively as we could?”
Dominic Barton: One question I would be interested in as a board chair and member is, “Are boards constructing themselves differently—in terms of skills, but also in terms of committees?” That’s something that we at Rio Tinto really reviewed fundamentally, almost a clean sheet—what are the committees? Obviously, if there are critical fiduciary ones, you have to have an audit committee. There’s a strategy process, but when you’re thinking about geopolitics, is that going to be infused into the group?
Frithjof Lund: I do think there are a lot of discussions around, “How do we ensure that we have a composition and the raw materials for the capabilities on the board that can tackle geopolitics?” But it’s the same question around some of the technology trends, some of the macroeconomic trends. How do we ensure that we have a composition that reflects the strategic needs of the companies? Some are spending a lot of time on developing capabilities and trainings and bringing in externals onto boards. Some are, of course, also shifting composition and considering, “How do we get that experience directly represented on the board?”
Sean Brown: Are you seeing any significant changes in terms of how nonexecutive directors, or NEDs, are preparing themselves, and how they are gaining the geopolitical insights?
Frithjof Lund: In terms of how you prepare for this, we do see a lot more attention around formal board trainings for current board directors, but also for the ones who would like to become board directors.
Dominic Barton: I think there’s another element, which is how those NEDs spend their time. It is much more than only being in the board room and reading a lot of board papers. There’s your engagement with the organization and then your engagement with the outside world. And I think, again, depending on the company, if you’re a very domestic company, it may be different, but even then, I think you have to have some awareness of the geopolitical issues.
Ziad Haider: Building on that, I think the traditional model for many companies is that understanding geopolitical risk is a bit like an impressionistic painting—an anecdote here or a conversation there, or something one has read. And then, on top of that, let’s not forget, geopolitics is personal. Everyone is coming from a particular cultural context, reading a particular set of publications or not, depending on the level of access to media sources, and so on.
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There’s this idea of having an aligned fact base, a clear basis on which a board can understand what is going on in the world and how we want to then respond to it. What many organizations need is a laser beam—a focused light identifying the issues that matter to the organization, because not all geopolitical risks are created equal. Having a unit that is actually a bit of an “eye in the sky,” working with the other skills teams, and painting an integrated dashboard picture for the board on: “Here are the key legal, regulatory, people, and data issues related to a couple of markets that the board is focused on.”
Sean Brown: How are companies doing this, and is it happening more in some industries than in others?
Ziad Haider: We see a lot of that happening, starting off with financial-services firms. A number of them have set up these types of geopolitical risk units, oftentimes within their overall risk functions. For tech firms, it tends to sit more in the regulatory-affairs functions. For firms with heavy supply chains, it tends to sit a bit more with the security folks.
The second model for insight is actually, “Let’s bring in someone to be the point person at a very senior level.” I can think of one major global auto player where a member of the board took on an additional role as vice chair of public policy and was organizing the entire effort around how to think about geopolitical risk and regulatory engagement, and so on. The third is, of course, advisory councils, composed of experts from a wide range of backgrounds—I think diversity of backgrounds is quite important. I often say we now live in a more multipolar world, but that requires multipolar perspectives.
Dominic Barton: I think one of the key things, which you’re mentioning, is how do we go from kind of the chitchat, the vague reading of the news update type of stuff, to the practical side of it. And obviously, there’s a variation depending on what type of firm you are. There’s not one model for all, as you were saying. But I think the notion of having sort of a serious, integrated view of that is key. It could be in your strategy. How impactful is geopolitical risk to us? What are the risks? Maybe there are some silver linings? And be very clear about that.
And then decide whether you’re going to go with a risk unit. For Rio Tinto, we do have a dedicated team. But that’s for us. Again, it depends on what those geopolitical risks are, and then the frequency and the criticality of them.
Sean Brown: Does asking directors to be more involved in geopolitical issues change that relationship between management and boards?
Frithjof Lund: The clear answer is, yes, it has implications, and we have seen that change. I mean, the management runs the company, and the board is there to both challenge and support. But we do see that there is a movement toward a higher degree of engagement, and also involvement across all the topics—on strategy, on talent, on investments, on risk. And that is also expected, by the way, from almost all stakeholders. I think the implication is that there often needs to be a discussion between, especially, the CEO and the chair (or the lead independent director, if you’re having a combined role) to really delineate the roles and responsibilities and align on the expectations.
Also, remember that many chairs and CEOs have grown up in a time when boards were less involved. And, of course, we’re transitioning from the era of the imperial CEO. We probably still have a few of those, but I think that landscape is changing.
Dominic Barton: I completely agree with you on the approach. I think one of the challenges with geopolitics—unlike things like performance management or, to some extent, strategy, where there are numbers and facts—is that often it’s views, perspectives, images. So I think it’s got to be structured, and that’s why I think some framework, with a group in management that’s driving it, is good. It’s good to have board perspectives and views, but I’d be very careful about the board deciding that, therefore, “we need to go north or south on here.” It’s input into the process, and then that can be updated regularly to sort of see where things go.
There’s also the impact of geopolitics on employees. And again, it depends if you’re a more global organization, but if you’ve got employees from different parts of the world, what you do or don’t do has very significant repercussions.
Sean Brown: Thinking about building that geopolitical insight muscle, is there a minimum threshold of effective insight that can help maintain a dispassionate, clear-eyed viewpoint?
Ziad Haider: I think the way I’d frame it is that this is not a compliance team or the legal security team. This is not a division, like an army division. This is a bit of a Special Forces model. Why do I say that? It’s because if you take my point that geopolitical risk is legal risk, it’s reputational risk, it’s supply chain risk, you cannot have any one kind of empire standing unto itself. This geopolitical risk team needs to be working clearly and consistently with other teams.
I think the second point is mandate. Does this team have the mandate to do this? Otherwise, it turns into this dynamic that would be very familiar to many people about who owns this. Because again, if it’s so cross-cutting, security would say, “We have a role.” Legal would say, “We have a role.” The board or the leadership team needs to be very clear that there is this mandate given to this team. I think the third thing, and this goes a bit to what Dom was saying, is, “Is there a sponsor on the board?” You need to have this thing anchored up and down the organization—thinking of where it sits, thinking of how it’s linked up, thinking of how it’s resourced, and being very clear that it’s not a stand-alone team. It’s meant to be kind of an integrator role.
Sean Brown: So how are boards practically managing and structuring geopolitical discussions? How does it work if you have a dedicated unit for geopolitical risk?
Ziad Haider: I think risk and audit committees, in particular, are having to ask themselves, “Do we need to tack on more of these public policy questions into our ambit, or do we need to be coconvening with another committee on these topics?” Or sometimes it’s a stand-alone committee. There’s a bit of a magnifying glass that needs to be taken to the committees on a board and to look at whether they’re actually fit for purpose to deal with the problems that they’re facing.
I also think upping the clock speed, given the velocity of these issues, is critical. So a regular cadence, again, with structure, thinking of what the priority markets are. If you think of it as an exercise of tiers one through five, with number five the highest level of risk that an organization faces, perhaps the board’s focused on three to five on a recurring basis and one to two on an as-needed basis. But having a structured way to examine the vulnerabilities and the opportunities is quite important.
Lastly—I think this is so profoundly important—where the board meets matters so much. It matters because it sends a signal externally to stakeholders. It sends a signal internally to colleagues that, amid this fragmentation and tension in the outside world that very quickly manifests inside, the board is committed and is spending time to show up in complicated markets sometimes.
Sean Brown: What other aspects should boards and CEOs be considering to accommodate this increased geopolitical risk and complexity?
Ziad Haider: The other piece is, how do you actually want to structure your discussions? What exactly should the board be looking at? And again, I do think that there is a discipline to how the board should be talking about geopolitical risk and its impact. In general, what we see is there are these six dimensions where geopolitics are really hitting an organization: their supply chains—how you think about the level of localization versus maintaining a more global footprint—ownership, R&D, tech stack, capital, people. The question for global companies today really in many ways is, “Can we remain global, and if so, how?” And the “how” is where the board has a critical role to play in terms of helping the leadership think about, at a strategy level, “How do you want to set up and operate along these six dimensions?”
If we take the tech stack, for example, there’s a very clear trend line to many organizations now having to create separate tech stacks in certain markets. For compliance reasons, for geopolitical reasons, and you name it. And the choices over there are, how frequently do you do that? What are the costs associated with it? There is a cultural aspect to moving a global organization from one tech stack into a series of segmented ones. So these aren’t just esoteric questions of technology or supply chains. These are actually questions that are quite existential to what it means to be a global organization, and to how the company wants to operate globally, in an era where we’re living in a highly connected but increasingly contested world.
Sean Brown: Can we talk about the concept of “black swans, gray rhinos, and silver linings” as a way to think about anticipating geopolitical risk?
Ziad Haider: Yes, so we can think about the geopolitical drivers out there in three categories. The black swan events are unknown risks of high impact; the gray rhinos are known risks of high impact; and then the silver linings are about, “What is the opportunity set amid geopolitical volatility?” For a board, it’s quite critical to be able to step back and think about, “What could be these three buckets for us, and how do we want to factor them in, in terms of steering an organization?”
The idea is, how do you bring together the geopolitical risk and the opportunity and have the board think about those questions, to be able to better guide the organization, not just in the present but into the future as well?
Dominic Barton: I found it very helpful to just think about: “What does geopolitical risk mean?” I think this kind of frames it. And I also think getting that understanding and being clear about it on the six dimensions will help determine where you should be spending time, or whether you need what type of special unit or oversight.
And then, if I think about the foresight, we look at it just as a mindset thing. It’s no surprise that financial-services companies have to be good at this, and I think actually lead in this area. Even if you’re a domestic player, you are linked to the global system, so there’s some degree of having to think about that.
But most important, you are regulated. And the regulators may expect that different scenarios will be looked at. One of the questions I put to one board was, “We don’t have a regulator in the US. Imagine if we did. What would they expect us to be able to have scenario planned or stress tested?” That’s been a very helpful discussion. It led to a lot more scenarios being looked at. They got quite specific in terms of issues. Maybe that’s a low-probability, massive impact. Well, we’d better have a view about what happens, because a bank would have to have a view.
It’s almost putting a regulatory frame over it, and that is a helpful push to say, “Are we being aggressive enough in looking at it?” Because some of this stuff is so hard, or it’s so complicated, that you kind of say, “We don’t have to worry about it too much. Hopefully it goes away.” I would urge you to at least push on it.
