Strategy & Operations » Governance » Threat of interstate conflict brings war room issues to the boardroom

SOME 25 YEARS after the fall of the Berlin Wall, dark fears and even darker forces have returned to taunt and haunt the world.

‘Interstate conflict with regional consequences’, according to the latest edition of the World Economic Forum’s Global Risks report which is compiled by some of the planet’s foremost experts and decision makers, is once again the biggest threat to the world.

In terms of likelihood, it exceeds extreme weather events, failure of national governance systems, state collapse or crisis and high structural unemployment or underemployment as a risk. Other major risks are rapid spread of infectious diseases, weapons of mass destruction and failure of climate change adaptation.

Even an impartial viewer stumbling across the TV news can’t have failed to absorb the gravity of the invasion of Crimea in March 2014 to see how such actions can destabilise entire regions and send out economic and political aftershocks long after the first shot has been fired.

Other key events, such as the dramatic rise of Islamic State (IS), brought state collapse and the failure of national governance back into public consciousness. At the same time, health-related risks – such as pandemics, which were last considered impactful in 2008 – have returned to the unglamorous top, following the unprecedented spread of Ebola.

Nor is Europe safe anymore as ‘blowback’ from IS-inspired Islamo-fascist terror is all too real. The Charlie Hebdo killings in Paris and the Jewish Museum murders in Brussels are all too graphic and painful reminders that the world is an angry place.

And it is FDs and other C-suite level executives who must increasingly put themselves metaphorically in the firing line of these and other emerging threats in a bid to develop and formulate strategies to protect their companies’ personnel, reputations and profits as they operate in a more angry world.

Charles Hecker, global research director of Control Risks, an independent, global risk consultancy specialising in political, integrity and security risks, is quick to point out that not doing anything is no longer an option: “There’s no such thing as far away anymore. There’s been a tendency for companies to think that conflict and geopolitics don’t really concern them. Those days are over. Everyone has to be concerned about what’s happening in Ukraine, Syria and Iraq, and in China’s maritime waters.”

Choke points

Risk graphClearly, it is companies that have a network of overseas offices that have the most to lose. Hecker, who headed up the firm’s Moscow office until 2010, said companies with a broad global footprint often have “choke points” in places where they don’t even know about them. This could be in the supply chain, a source of natural resources or input, or in an important market.

“Global conflict has a way of impacting us in London or anywhere in the world in ways that aren’t expected. With interstate conflict, what is interesting is the nuance underneath that – it isn’t always military. We are seeing a lot of unconventional conflict between state actors, between countries. It could be everything from ‘the little green men’ that invaded Ukraine and Crimea on behalf of the Russians to propaganda conflict, economic, trade and cyber conflict. States are engaging with each other in conflict which doesn’t always involve soldiers,” he explains.

So what does he advise companies to do? First, acknowledge that these issues are important.

“Number two, realise that while security directors have a crucial role in raising companies’ awareness of security risk, our advice is that risk issues have to be owned by the entire company – otherwise, they don’t get the company-wide cultural recognition that they deserve. And, when a crisis emerges, it’s too late,” he says.

“Map your footprint. Where is your company exposed? Where do you do business? Where are your pinch points, your customers and suppliers? A lot of companies, even at very senior levels, simply don’t know where they are exposed to risk.”

Risk analysisSomeone who is acutely aware of the inherent risks involved in operating in conflict zones is Zack Friedman, CFO of Mina Group, a global integrated energy service and supply company, which boasts a multitude of US government contracts in territories across the Middle East and Central Asia. Mina is the largest supplier of jet fuel to the US military in Afghanistan, supplying the vital commodity to the United States Air Force (USAF) at its Bagram airbase, located some 20 miles outside Kabul. In Oman, it’s also building – on behalf of the US Navy – a bulk liquid storage facility capable of holding 51 million gallons of jet fuel and marine diesel, due for completion later this year.

Finance teams need to understand the entire operation, stresses Friedman: “It’s simply not acceptable to just understand the accounting. They need to know how trading works, what the flow of goods and transactions are, and who the key counterparties are.”

Active leadership

Risk graphYet before taking on a project or investment in a new territory, it’s imperative to identify the core risks and think about the interconnections that exist between them, explains the 37-year-old Harvard graduate, who once interned at the White House during Clinton’s presidency.

That means quickly getting to grips with the geopolitical and economic risks prevalent in that market. It also means having an “active leadership to ensure strict compliance with financial controls oversight and accounting standards”. New entrants, he says, should “understand who they’re really doing business with” and ensure they have “robust accounting policies as there may be different accounting treatments in different parts of the world”.

Friedman, who confesses to taking on more than just a CFO role by immersing himself in all operational aspects of the business, also advises companies to take a robust hedging stance to mitigate against currency swings. He swears by the effectiveness of having a sound local team in each country – a solid mix of savvy locals and switched-on expat managers all closely attuned to the ebb and flow of the daily political pulse helps to underpin effective operational logistics and the seamless running of the business.

“Safety and security is a big issue for companies to think about,” Friedman explains. “Keeping your people safe, no matter what the cost, has to be the number-one priority. You need to protect the lives of your people and, working with the military, we take that very seriously.”

Abdul-Jalil Ali is interim finance and services director of Islamic Relief Worldwide, a charity that is well versed in delivering aid in conflict zones where some organisations cannot – or will not – work. Two areas where it is currently delivering aid are Syria and Iraq. It operates with one clear mandate: to assist ordinary people ensnared by conflict in need of food, water, shelter and healthcare, regardless of race or religion.

“We have put systems and processes in place over many years to do all we can to ensure that money does not get into the wrong hands and aid gets through to those who really need it,” he explains.

“As finance director, my job is to ensure that these systems continue to operate to a high standard, and that is something we do through rigorous monitoring and evaluation, backed by numerous independent audits to verify our delivery and highlight where there is room for improvement. A lot of what we do is common sense – minimising the amount of cash that is kept or carried in offices or by staff in conflict zones.”

It tries to procure aid close to where it is needed as it is more cost-effective, supports the regional economy, and avoids lengthy transport issues. But the charity also has to avoid courting unnecessary risk in where and how material aid is stored and distributed. During the recent devastating floods in the Philippines, Islamic Relief used Western Union Business Solutions to securely transfer funds immediately to coincide with its staff landing in the country, thereby enabling them to purchase and distribute aid packages and supplies to the worst-affected areas.

“In the case of Syria, we procure aid across the border in Turkey and have our warehousing there, only taking it into Syria when we can be sure of being able to distribute it swiftly and effectively. The distribution is done through a small team of Syrian nationals employed directly by us, avoiding the added danger of working through expatriates and minimising the accountability and control risks of operating through third parties,” explains Ali.

“The financial and operational risks we face in Syria and Iraq are the risks we face in any conflict where proscribed organisations are active. Sadly, the life of a humanitarian aid worker can be a perilous one, and one of the biggest challenges is keeping our staff safe. There are no guarantees, and an element of risk is inevitable, but we have security protocols developed with knowledge of the local context to protect our staff as much as we can.”

While Islamic Relief does not currently operate in IS-controlled areas of Syria and Iraq, it is involved in delivering aid to people displaced from these areas. And the risks that charities can face are not only simply confined to the conflict zone itself. Delivering aid in conflict zones can be subject to intense government, donor and financial scrutiny.

“We make it our business to ensure we have close and transparent relationships with our banks, the Charity Commission and institutional donors to ensure as far as possible that the challenges we face are understood and that bureaucratic restrictions do not stifle our ability to continue serving those in need,” says Ali.

He says aid organisations operating in conflict zones need to maintain the highest humanitarian standards of neutrality, impartiality and independence, a challenging proposition if it should be placed under pressure by a party involved in the conflict, or caught in the crossfire of political allegations and counter-allegations.

“We communicate with the relevant authorities on both sides of any conflict but take particular care in sanctioned jurisdictions or where proscribed entities operate to ensure that we comply not only with UK law but also international laws. This includes avoiding undue interference in aid delivery,” he explains.

Lure of Africa

And it is precisely because much of the Middle East is becoming a less palatable and attractive business theatre, fused with the fact that large swathes of Asia are becoming much more expensive places in which to do business, that the lure of Africa continues to seduce. That’s the view of Nathalie Wlodarczyk, managing director of IHS, an economics and country risk forecasting specialist.

The continent – one of the most interesting and fast-paced business environments on the planet, according to Wlodarczyk – is brimming with challenges and opportunities. It also happens to be her own area of expertise. Many companies, both those dipping a tentative toe into Africa’s varied economic waters and even experienced Africa hands, often fail to fully grasp that it is not one country, but 50. And each one is different.

Speaking to people and governments in Africa, Wlodarczyk says that most are keen to get western operators in, but they have had mixed experiences with companies providing goods or building infrastructure.

Entrants should be culturally sensitive to the historical touch points of the past that bubble under the surface of the present. Belgian companies may struggle in the Congo, for example, given the dark, Conradian spectres of King Leopold II’s brutal imperial power plays that turned the country into a labour camp, leading to about ten million deaths, all in pursuit of rubber profits.

Supply chain integrity also  represents a tough and specific challenge to overcome. Electronic companies, for example, need to be aware that a high proportion of minerals used in a dazzling array of high-tech items like smartphones may have passed through rebel group-controlled territory in the Congo or, in Asia, Indonesia.

“Very often, the supply chain that takes minerals from the ground to put them into your phone is a little bit obscured,” said Wlodarczyk. “Tech companies are now realising that this exposes them in a way they hadn’t thought about before. It’s not necessarily straightforward for them to know exactly where the minerals that went into components that went into a telephone – and were sourced from somewhere in China or South Korea – actually came from,” she says.

“If it turns out that it did come from a mine controlled by a rebel leader, you have inadvertently been funding conflict and that may expose the company to prosecution” – a new threat in the last few years as legislation has been tightened up.

Wlodarczyk’s watchwords are to ‘remember the interconnectedness of everything’: “Remember to look a few steps down and several iterations through. Lower oil prices have an impact on the Chinese economy and that has impact on places like Venezuela and Angola and that has an impact on whether people are protesting on the streets and whether governments as a result feel pressure to change legislation.”

Packing heat

Somewhat closer to home – and despite the country’s proxy war with Ukraine in Crimea, and the subsequent Western sanctions, falling oil prices and a plunging rouble – businesses should still seriously consider Russia as a fertile ground to do good business.

That’s the clear view of Control Risks’ Hecker, who is adamant that, with some serious “homework”, the former Soviet behemoth represents a solid punt.

“Russia is not a gangster state. We have far too many clients doing clean business there. It still represents a good opportunity, but Russia requires extra homework. It’s no longer gangster capitalism – it’s rough and ready, but nobody’s packing heat anymore,” says the fluent Russian and Czech speaker.

“Russia is under a lot of economic pressure right now, but the trajectory is one of a hungry and emerging middle class with broad opportunities everywhere.”
Hecker is clear that when investing in Russia, one needs to be sensitive to the issues of risk: “In the 1990s, you could invest in Russia, make a quick buck, and go. You can’t do that now. You have to adopt a long-term perspective and you can’t let isolated crises turn you away – Russia is integrated into global economy now.”

He decries people who say, ‘Oh, it’s the new Cold War’, asserting with knowing confidence that this is utter tosh.

“The Cold War was a label for a time when the USSR was actively excluded from the global economy and one of the reasons why we have not seen the most severe sanctions levied on Russia right now is that it is thoroughly integrated into the global economy – and that’s why the long-term trajectory is still positive,” he explains.

The old adage of knowing your customer and knowing your partner is especially pertinent in Russia. As is understanding with whom you are doing business – because the Russian business environment is still insufficiently transparent, which makes it difficult to get objective and reliable information about Russian business. But it’s a situation that is getting better all the time, says Hecker, warming to the theme.

“The issues have changed in Russia – the environment has become more transparent than it was in the 90s but it’s still insufficiently so, especially for public, listed companies that are regulated and have audit committees and activist shareholders. And with the pressures of the UK Bribery Act, Russia presents a business environment of elevated risk on those fronts,” he explains.

“People aren’t thinking of Russia as a mafia state like they did in the 90s; it’s faded as a concern. There’s been a privatisation of organised crime in Russia and now, rather than people going around with heavy gold jewellery and garish jackets, it’s all pin-stripe suits and expensive leather briefcases.”

Hecker points to Putin’s own anti-corruption drive as now being part of Russian public discourse, but he admits that there are “valid questions to be asked about whether such campaigns are designed to reduce corruption in the Russian economy or to hobble politically inconvenient players”.

In Russia, western organisations have a way of getting caught in such campaigns.

“Will you be asked to pay a bribe one day? What do you do if that happens and what is your response? You may have a fantastic anti-bribery and anti-corruption policy in the head office, but do your sales agents on the ground know about it, and do they believe in it?” he asks.

His parting advice for FDs, wherever they may operate, is to get a big world atlas.

“I have huge map of the world in my pocket and I think the C-suite should have one in their offices and see where they are exposed. If you have a footprint in Norway – great, sleep easy. If it’s in a higher-risk jurisdiction, you don’t need lose sleep – just do your homework,” he concludes. ?