Doing business round the world, respecting the globe or doing business with the world? Three different viewpoints, three different approaches representing the three stages through which the relationship of business with society and the envi-ronment, centered on respect, has moved till now: From the concept of just “being”, to an approach centered on respect and now, finally, one that is focused on cooperation.

The world evolves and so do society and organizations. The challenges faced become more numerous, more complex and difficult to deal with. How can we tackle such very different events as the recent social and political unrest in some Arab countries and natural phenomena causing devastation that result in serious environmental problems?

According to Mike Rosenberg, Assistant Professor at IESE Department of Strategic Management, geopolitics is one of the elements that must be developed and incorporated into companies’ sustainable management, to enable them to understand, respect and interact with this growing situation.

The role of history in the sustainable approachKnowing about a country’s history gives us a special insight into its background and helps us understand its internal, ethnic and national rivalries when dealing with local business partners, clients, suppliers and employees. It does not necessarily mean having to take decisions based on this knowledge, but it does mean that sensitivity in this area can contribute greatly to the success of a company’s operations.

In the context of globalization, a knowledge of history also provides us with keys to behavior in what may often be an uncertain future. For example, China is one of the fastest-growing countries for international business activity within its territory and yet most executives who move there have no relation to the country, know next to nothing about its history, have a simplistic view of the situation centered on China’s growth figures and the time it will take the country to pull ahead of Western economies(in the famous words of Mao Tse-Tung: “China is like the atom: when her energy is released its power will be unstoppable”).

A series of global challenges means doing business is becoming much more complex than it used to be. How can we face up to these new challenges and deal with them in the context of CSR? Events like the recent uprisings in North Africa or environmental disasters such as the Japanese earthquake mean that geopolitics now occupies a central place in business strategy.

Strategy DocumentsI03/2011

Doing business with the world: social changes and future trends that will affect CSR

Public Affairs

Insights

Insights 2

This is similar to trying to operate in twenty-first century Europe by only looking at the macro-economic situation, without considering the underlying social and geopolitical issues. Forecasts for the 1940s would have been incredibly good – if it had not been for two consecutive World Wars which caused millions of deaths, and an economic recession between the wars which ruined Western economies.

One of the burning problems in modern China is the gulf between growth in the coastal regions compared to inland areas. The Beijing government is investing in infrastructure to improve and alleviate this situation to a certain extent, but there is a serious, hidden danger of territorial disintegration which could reproduce events in the tenth century when China broke into ten independent states at the end of the Tang dynasty.

Geopolitics for a changing worldSimilar reasoning applies to the study of politics and their relation to a given situation in a particular area of the world. This includes changes in local political leadership and how a country gets on with neighboring states: not only in order to assess risk but also as a way of estimating new opportunities for companies.

In this sense, the digital breach is fuelling rapid change. There is a growing convergence between digital, financial and political sectors and the behavior of interest groups. National differences, in turn, based on cultural administrative, geographical, linguistic, ethnic and economic considerations, are

key confidence factors for setting up good business and trading relations, as well as the values on which these are based.

For this reason, more and more business schools world-wide are including modules on the study and management of geopolitical issues in their head management and CEO training programs. Similarly, large multinationals appoint ex-presidents and prime ministers and ex-chairmen of international organizations as independent directors to their Boards, to benefit from their view of the global economy and their experience of the interaction between geopolitics and corporate governance.

Global consultants also draw up studies and reports on the emergence of new issues such as the geopolitical and economic risks to be taken into account by large companies in order to make the right decisions and plan ahead correctly.

The connections between business leadership, economic policies, the social situation and world governance are obvious and future trends can indicate concerns to which Management Committees world-wide will give priority:

Energy and geopolitics.•

Globalization and growth.•

Anarchy, war and disaster.•

Environmental sustainability.•

Technological innovation.•

Aging and immigration.•

Emerging economies and country riskIn technical terms, the four types of risk associated with overall risk as a country are the following:

1. Political risk: probability of confiscation or expropriation of capital, as well as the difficulty of repatriating assets and persons.

2. Sovereign risk: the probability that a State will totally or partially default on its debt by deciding definitely not pay off a loan.

3. Transfer and liquidity risk: probability that a business in debt is unable to meet payments because of official restrictions.

4. Macroeconomic risk: probability that a lender is unable to offer a loan due to problems with a country’s economic framework.

Different international organizations, such as the International Monetary Forum, rating agencies such as Standard & Poor’s, the World Bank or investments banks such as JP Morgan use different methods to carry out studies and draw up indices to advise businesses about investment and operational risks and the risk of working in a given country.

Doing business with the world: social changes and future trends that will affect CSR

‘One must progress

from a point of

view based on “being”

to an ap-proach fo-

cused on “respect”

and finally, attain one

that is cen-tered on

“co-opera-tion”’.

Example of a Comparative Risk Assessment

Source: World Economic Forum; 2011.

Natural disasters Fiscal crisis Nanotechnology risks Infectious disease,

developing world Transnational crime

and corruption Interstate & civil wars Food insecurity

International terrorism Loss of freshwater Collapse of NPT Pandemic Globalization Natural disasters Natural disasters Natural disasters Natural disasters

2 - 10 billion

0% 10% 20%

0

10 - 50 billion

50 - 250 billion

250 billion - 1 trillion

More than 1 trill.

Likelihood

Seve

rity

(in

US$

)

Insights 3

The principal indicators should cover:

Economic performance.•

Institutional conditions.•

Total debt.•

Balance of payments on current account.•

Access to bank financing.•

Legal security of investments.•

Social and cultural tensions.•

Wars.•

The principal risk indicators are:

EMBI (Emerging Markets Bond Index): •an economic index issued daily by the JP Morgan investment bank since 1994. It tracks the difference between returns on the public debt of emerging market countries, with reference to the return for US public debt, which so far has been considered free from the risk of default.

EMBI Plus or EMBI+: is a variation •of EMBI, started up in the 1990s, which tracks sovereign credit rating for foreign bonds and other new voluntary debt. It is composed of 109 financial instruments from 19 different countries.

EMBI Global: calculated since July •1999, it is an expanded version of EMBI+, and uses a selection process for different countries. Its liquidity constraints are more relaxed. It rates the markets of emerging countries using a combination of their ‘per capita’ earnings as defined by the World Bank and the restructuring of debt for each country.

Other rating agencies: Moody’s, Standard •& Poor’s (S&P) and Fitch IBCA.

Finally, a further aspect to take into account is the existence of countries or regions in which there is always a high exposure to risk - for example, the risks from natural disasters in some areas of Asia and the Americas, or risk because of racial tension, such as Central and Southern Africa and the Middle East, or in regions where there are problems with energy supply, such as North Africa and some parts of Eastern Europe.

Geopolitics and Social and Corporate ResponsibilityWorld forums, at which the leading politicians from the most powerful countries in the world meet, such as G8 or, since 2007, G20, have given CSR the same importance in business as concerns such as climate change, international security, sustainable development or free trade.

The G8 meeting stated that “its leaders guarantee the will of their countries to promote and reinforce Corporate Responsibility and other forms of Social Responsibility as one of four priority areas for action”, through internationally agreed social, environmental and labor standards, as in the case of the recently approved ISO 26000 guideline or the Global Compact.

One of the most obvious applications of geopolitics to CSR management is its usefulness when providing relevant information for world-wide business on trends, key players, or potential impacts which then are reflected in studies on material aspects or relevancy, reputation risk map or stakeholder maps, for example.

Conclusions: a strategy for the earthRemembering the past is part of preparing for the future, because history always repeats itself. In order to operate in a globalised world one should be familiar with the history, social, political, cultural, and economic context of a country or region, as well as knowing about the value source of one’s own business and where these two concerns converge, how the firm’s interests accord with those of worldwide society and the changing situation in which they find themselves.

An inhabitable environment, a viable economy and a just society are not optional requirements but essential conditions for turning a company into a financially sustainable business project. To see the future is to anticipate events, in order to avoid failure or rejection in one’s business activity and to produce a successful organization.

Doing business with the world: social changes and future trends that will affect CSR

‘An inhabitable

environ-ment, a

viable economy

and a just society are

not optional require-

ments but essential

conditions for turning a company

into a financially sustainable

business project’.

Fuente: Pyramis Global Advisors, 2011.

Management for sustainable business

Proprietary ModelsExternal transferInternal transfer

Break even analysis

Proprietary ModelsSovereign spread

Credit curves

Corporate reportsRelative value

Security modelsYield curve analysis

Sovereign reportsTravel

Portfolio Construction

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