Geopolitics is a boardroom issue

For the longest time, geopolitics was seen as something outside the boardroom. Governments and diplomats dealt with it. The risk team might track developments and flag them to management. For most boards, however, it was rarely on the agenda. 

That is changing. Geopolitical risk is moving up the board agenda, alongside cyberrisk, regulation and other threats that can materially affect a business. Directors are increasingly having to ask two basic questions: What is happening in the world? And what does it mean for our business? 

The reasons are not difficult to see. Tariffs imposed by the United States changed the economics of an export business almost overnight, while its sanctions cut companies off from markets they may have operated in for years. The US-Iran conflict has shown how quickly geopolitical tensions can disrupt shipping routes, energy supplies and critical supply chains. Technology controls can restrict access to important components and equipment. Regulations in one market can also alter the economics of an investment elsewhere. 

The European Union’s Carbon Border Adjustment Mechanism (CBAM) is one example. It puts a carbon cost on imports of products such as steel, aluminium, cement and fertilisers. For Indian exporters, the carbon intensity of production can increasingly affect their competitiveness in Europe. 

These examples also show that geopolitical risk is not just about wars, sanctions or military conflict. A regulatory or climate-policy change in another country can affect the value of an investment or the viability of a business. Companies investing across borders, including into India, have already learnt this lesson. 

The question for boards, therefore, is no longer whether a geopolitical event will occur. It is where the company is exposed when it does. And this requires a different approach to risk oversight. 

Boards need to understand a company’s critical dependencies — on countries, suppliers, customers, technology, raw materials and logistics routes. More importantly, they need to know where concentration creates vulnerability and how quickly alternatives can be found. 

This means moving beyond monitoring to scenario planning. What happens if a key supplier becomes inaccessible? What if a major shipping route is disrupted? What if tariffs rise sharply? What if sanctions affect an important customer or market?

These are no longer hypothetical questions. 

Scenario planning is not about predicting the future. Its purpose is to understand the consequences of different scenarios and decide beforehand what the company can do. 

That could mean diversifying suppliers, maintaining alternative manufacturing capacity, holding critical inventories or having clear crisis protocols. None of these measures comes free. Resilience usually has a cost. The question is whether that cost is justified by the vulnerability it addresses. 

There is another complication. Geopolitical events can move much faster than traditional board processes. By the time an issue comes formally before the board, the window to respond may already have narrowed. This makes the quality and timeliness of management information particularly important. Boards need reporting that identifies emerging risks and not just reports what has already happened. This also changes what directors should ask management. It is not enough to ask whether geopolitical risks are being monitored. Directors need to understand the company’s exposure, the assumptions behind its strategy, and how resilient the business would be if those assumptions changed. 

For Indian companies, the issue is becoming more relevant as well. India is increasingly integrated into global supply chains and is seeking to become a larger manufacturing and investment destination. That creates significant opportunities, but it also brings greater exposure to trade tensions, technology restrictions, shifting supply chains and changes in global alliances.

In the current context, Indian boards are asking three questions: How often does the board discuss geopolitical risks? Which board committee has primary oversight? And how does the board stay informed about geopolitical developments that could affect the business? 

Separate board surveys by EY and Deloitte, among others, suggest that geopolitical risk remains under-discussed, with only about a third of boards reviewing it more than once a year. Increasingly, boards are calling for more frequent reviews, including quarterly discussions. 

There are also differences in how boards organise oversight over geopolitics. Large-cap and mid-cap companies are broadly similar in assigning primary responsibility to the full board. At the committee level, however, mid-cap companies rely more heavily on the audit committee, while large-cap companies are more likely to distribute the discussion across several committees. 

How boards educate themselves is equally important. Internal updates and deep-dive sessions remain the main sources of information. Larger companies are more likely to supplement these with external advisers and subject-matter experts. Periodic briefings and scenario exercises can help directors understand not just what is happening, but how different developments could affect the business. 

The board does not need to become an expert in geopolitics. Its job is to make sure geopolitical developments are translated into business consequences: What does a conflict mean for the supply chain? What does a tariff mean for margins? What does a sanctions regime mean for customers? What does a change in regulation mean for an overseas investment? These questions increasingly belong in the boardroom, alongside capital allocation, strategy, succession planning, and risk appetite.

Boards cannot control geopolitical events. They can, however, determine whether the company understands where it is vulnerable, has tested its response and is prepared to act when circumstances change. 

 

The writer is with Institutional Investors Advisory Services, a Sebi registered proxy advisory firm. 

The views are personal. @AmitTandon_In