Political risks on the rise - How to act?
In a nutshell, companies have four options for responding to political risks: do nothing, run away, transfer the risk, for example through insurance, or find a solution.
From a business perspective, political risks are on the rise both in Finland and internationally. Trump, the rise of protectionism, Brexit and geopolitical tensions are all examples of factors that are affecting Finnish companies' business, to a surprising degree. For some, the impact is direct, such as new tariffs or currency losses due to Brexit, but for all, changes in trade policy in the major powers are at least visible through cyclical fluctuations in the global economy.
EU legislation also plays a major role in making predictability more difficult. According to various estimates, more than half of Finnish legislation stems from EU decision-making. The EU has simply increased the volume of legislation, thus creating additional work in monitoring risks. On top of the decision-making in Brussels, vigilance is required to implement directives into Finnish legislation. The current government, including the government programme, has declared the "Finland add-on" to be a panacea, but in practice this has not happened and Finland often pushes through an unnecessarily broad national interpretation.
In domestic politics, predictability has been undermined by the increasingly short time span of policy-making. The openness and communication of the social media era require increasingly rapid decisions, even as the complexity of the issues and the scale of the reforms required increase. Politicians are tempted to succumb to populism and the accumulation of political brownie points. The breakdown of authority and the resulting decentralisation of power also play a role. Opinion leaders and popular movements can quickly turn public opinion around. The new world is challenging traditional parties and their ways of working.
Businesses should treat political risks like any other risk. First and foremost, they should be identified and monitored, then managed. According to traditional business risk management theory, a company has four options. It can keep the risk, avoid the risk, transfer the risk or reduce the risk. These same options apply to political risks.
Having identified the risk, the company can therefore keep the risk, i.e. do nothing and adapt to the political decision. Sometimes that can be wise and often there is no other option. The problem with inaction, however, can be that of being a bystander in an issue that affects one's own business. In terms of risk management, the outcome can be unpredictable. Moreover, an open society is hungry for businesses to be involved in influencing and debating. Standing still is less and less a viable option.
The second option is to avoid the risk, or to put it more bluntly, to "run away". In practice, this could mean, for example, moving production to another country or closing down some activities if political decisions make the operating environment too difficult or unprofitable. The relocation of Nordea's headquarters from Sweden to Finland is an example of this.
The third option, risk shifting, works better for pure damage risks. While it is relatively easy to protect against damage, for example through insurance, this option is more difficult to apply to political risks.
If a political risk threatens to materialise and the business environment is facing turmoil, the best option is to reduce the risk or find a solution. This requires staying alert, accurate analysis and timely action. Above all, however, finding a solution means that the company's solution benefits more than just the company itself. Successful advocacy needs a wider societal interest and shared values behind it. Today, lobbying is always an open, informed activity, seeking solutions that benefit everyone, including the company doing business.
Predictability is a key word for companies when assessing risks in their day-to-day business and especially when planning their development and investments. Predictable policies enable businesses to grow and create jobs. The hope for predictable, long-term policy decisions is high again this week, when the government meets for its framework debate.
Johanna Sipola
The author is the Director of Business Policy Advocacy at the Central Chamber of Commerce.