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It’s easy to “pigeonhole” or compartmentalize risk management. In fact, this is the traditional method of dealing with risk where the insurance department only deals with insurance risks, operations only handles operational risk, and the financial apartment only manages financial risk. This “siloing” of risk does not take into account the correlation or potential interconnection between risks. Modern risk management theory argues for a holistic approach that acknowledges an interconnected web of cause and effect between risks.
A recent article in the Financial Times highlights this modern approach. It notes that few firms have a political risk officer whose job focuses on how geopolitical events could negatively or positively affect the company. This observation is especially prescient in the current political environment where the old-world order of global trade liberalization (as codified by GATT) and regional trading agreements (such as NAFTA) are being replaced by nationalistic and anti-globalization forces.
A shrewd political risk officer would note that the rise of nationalism appears to be a global phenomenon, with such leaders being elected in Brazil, the United States, the Philippines, Hungary, Italy, and Poland. This trend is leading to a re-working of trade agreements. As a result, global supply chains may no longer be in vogue, forcing companies to re-source production within specific countries as opposed to shipping products to the same locations. This would, in turn, force companies to build new factories in new locations.
While it’s doubtful that political risk officers will suddenly become the new hot job, this does show how risk managers must consider a variety of risks and their respective inter-connections.