Episode Summary
The economic playing field is being reordered. What does that mean for boards?
“Decisions that are being made today are going to be existential to the long-term viability of the companies that they're overseeing,” suggests Kevin Kajiwara, co-president of Political Risk Advisory at Teneo, who advises Fortune 100 CEOs on geopolitical risks and their strategic implications.
Kevin joins Michael Leiter, head of Skadden’s National Security Practice, and host Ann Beth Stebbins, a Skadden M&A partner, in a conversation about how boards can effectively exercise oversight in today's geopolitical environment.
The U.S. had a remarkably consistent role shaping the general economic trajectory of the regulated free market for decades, Kevin says, but that playing field is now being reshaped, and “boards need to ask themselves if the type of economic actors that prevailed during the previous period will continue to be the preeminent actors going forward.” It is not yet clear what shape the new global paradigm will take, he says.
Mike emphasizes that political risk is no longer just dinner conversation at board retreats. Political decisions around the globe directly impact quarterly results, annual performance and future viability through effects on supply chains, tariffs, technology controls and data access. Business decision in one region now trigger counter-reactions from other jurisdictions. “If boards aren't thinking about it in those terms — the political decisions around the globe that will have direct impact on their quarter, on their year, on their viability in the future — they're not very good boards, and the company may not be around very long,” he says.
Boards can no longer focus only on the fundamentals of a company, because too much depends on external, political factors, he says. And political risk is no longer limited to the consequences of the next election.
Both guests recommend that boards incorporate international expertise when evaluating their own composition. Boards should also institute regular updates from management on geopolitical risks, and consider conducting scenario planning exercises to test management assumptions. Companies should review and update disclosures, including risk factors, to demonstrate board engagement and support management in navigating an increasingly complex global environment.
Voiceover (00:00):
From Skadden, you are listening to The Informed Board, a podcast for directors facing the rapidly evolving challenges of a global market, a compliment to our newsletter for directors. Our aim with this podcast is to help flag potential problems that may not be fully appreciated, explain trends, share our observations, and give directors practical guidance without a lot of legal jargon. Join Skadden partners, who draw on years of frontline experience inside boardrooms, to explore the complex issues facing directors today.
Ann Beth Stebbins (00:35):
In today’s global operating environment, the role of a board member has become increasingly complex. What is happening in the world could have a significant impact on a company’s business In today’s volatile geopolitical environment, how does a board effectively exercise its oversight role?
I’m Ann Beth Stebbins, a partner in Skadden’s M&A practice and host of The Informed Board. I’m joined today by Kevin Kajiwara from Teneo, a frequent adviser to corporate boards and institutional investors on geopolitical and policy risks, and my partner Mike Leiter, who heads Skadden’s National Security Practice. Kevin Mike, thanks for joining us today on The Informed Board.
So let’s dive in. The role of directors has been expanding to cover the oversight of external risks that may be material to a company’s business. Are boards taking a more proactive role in the oversight of geopolitical risks?
Kevin Kajiwara (01:31):
I think the answer to your question, Ann Beth, is yes, and it’s not necessarily by choice. It is the culmination of a series of events that have occurred over most of the 21st century, quite frankly, that are redirecting the focus and attentions of boards away from simply looking at the fundamentals of the company of the board that they’re on. There has been a fundamental reordering that is underway of the economic playing field that has prevailed for most of the post-war era. Go back to the global financial crisis and the debt crisis in Europe, the attempt to reflate the Japanese economy, the rise of China, the COVID era, and all of that did to the global supply chains and how much it highlighted the vulnerabilities of those supply chains.
Perhaps surprising to most boards is the evolving role of the United States, which after all designed, built, perpetuated, protected and, frankly, benefited the most from the system that we call globalization or the international rules-based order. If the playing field is now starting to change, boards needs to ask themselves if the type of economic actors that prevailed during the previous period will continue to be the preeminent actors going forward. Decisions that are being made today are going to be existential to the long-term viabilities of the companies that they’re overseeing.
Ann Beth Stebbins (02:58):
Mike, this is a real swing of the pendulum from the interdependencies, the system that Kevin just described, as designed by the U.S. to benefit the U.S., and particularly U.S. corporate interests. Is this a temporary state of affairs or is this a pendulum swing that we’re just seeing in its nascent stages that will continue?
Michael Leiter (03:24):
I think this is very much the nascent stages and will continue. I think it’s here to stay for quite some time. This is the one point I disagree with Kevin on. Only good boards are thinking more about this. Not every board, but the good boards recognize that political risk is no longer what you hear about at your board retreat every four years before a presidential election, where you bring in the speaker who sits there during the dinner and says, let me tell you all the stories from my time in the White House.
That’s not what political risk is anymore. The reason that it’s here to stay for at least the foreseeable future is because political risk now captures and affects tangible business risks that companies now have to look at through a political lens. And whether that’s the security of supply chains, global tariffs and retribution for tariffs, control of technology, access to data, all of which are being directly affected and driven as Kevin described by government decisions. And if boards aren’t thinking about it in those terms, the political decisions around the globe that will have direct impact on their quarter, on their year, on their viability in the future, they’re not very good boards and the companies may not be around very long.
Kevin Kajiwara (04:51):
What’s different right now is, not only that all of these variables are in play concurrently, but the evolving role that the United States is playing in this system. In other words, traditionally you could say, well, I’ve got a pretty good idea of what the overall playing field is going to look like and what the guardrails are. Yes, a new administration comes in, especially if it’s of the other party from the previous administration — you’re going to be a standard deviation away from mean. But if you zoom out and you look at the course of post-war history in the United States in terms of foreign policy and the general economic trajectory of the regulated free market, it’s been remarkably consistent from Republican to Democratic administration and Congress and back again. Now we’re talking about potentially a reshaping of the overall playing field, and I think that is what should be very disconcerting to boards and what they actually need to be taking a particular focus on.
Ann Beth Stebbins (05:53):
So while the United States designed the original playing field, the United States is a main driver of reshuffling that playing field and boards have to be in a position to understand how those changes will implicate the company’s business.
Kevin Kajiwara (06:10):
That’s right, but I think that the risk here is we tend to over index on what is happening out of Washington. The risk is to over index on this notion that the United States is driving all change. But the reality is that this is different than the first Trump administration, when there was everybody kind of saying, well, perhaps we can wait this out and we will return to a more normalized policymaking environment. Now I think that there is a view that it’s not just about Trump himself, that something fundamentally is changing in terms of the nature of how the U.S. wants to interact with the world, and that therefore this is more paradigmatic. Nobody’s got a crystal ball about exactly what the next paradigm is going to look like, but this interim period is going to be beset with a lot of uncertainty as different players based on whatever strengths and weaknesses they’ve got are going to be jockeying for position and trying to figure out how to best serve their interests.
Ann Beth Stebbins (07:07):
Mike, bringing things from a macro level to a micro level, companies are dealing in a global environment, they’re dealing with global counterparties. How should a board be thinking about its counterparties outside of the U.S. and how those counterparties are thinking about dealing with the U.S. corporate in this environment?
Michael Leiter (07:29):
As Kevin has been saying very well, what the United States before this era was striving for was fundamentally stability and openness. No, not in every case, was that exactly the same. Clearly the U.S. was trying to disrupt access to technology and the like by the Chinese, but overall, if you are a trusted partner, it was reducing barriers to trade, reducing barriers to technology, reducing barriers to access to data, and doing that in a relatively predictable long-term way.
What we’ve moved to is a very different environment where barriers are being erected to all of these things, exchange of data, technology, trade. Unless you give something else up as another country. And the natural reaction to that, they start reacting in kind — they start erecting barriers, they start protecting. So I think if you’re on a board, the first question you have to think about is not just where is my political risk, but how will political risk in one country, the United States and China and Western Europe, if I react to that, how will that drive other political risk?
(08:43):
And that’s quite a different calculus than most people have had to make. Let’s think about computer chips and enabling AI. The U.S. government has fluctuated about access to advanced Nvidia chips. Recently President Trump announced that Nvidia would be allowed to sell advanced H20 chips to China. But if you’re a U.S. company that relies on those Nvidia chips and you are doing operations in China, that’s been a huge change for you suddenly.
Or if you’re trying to develop artificial intelligence outside the United States, actually predicting where you can move those chips is incredibly challenging and if you choose to locate in one country or another, how will another country can respond? Any one decision will have follow on effects with other jurisdictions.
And no matter what the sector is, whether it’s technology, information services, financial services, any choice you make in one part of the world, another part of the world will question whether or not you are now deprioritizing them in a way that you might become a victim of political risk in that other region. Boards have to be in a position to understand that and provide governance such that those decisions are not just tactical one-offs, they can still maintain a longer term strategy and protection against downside risk.
Kevin Kajiwara (10:05):
The problem here is what Mike highlighted, which is this issue of stability, right, this ability to be able to count on the transparency of the runway and make strategic decisions. And to that extent, I think instability or uncertainty acts like a tax, in the sense that it perverts otherwise normal behavior. We see this both in long-term and short-term activity and planning, right.
So, over the course of this year as an example, we have seen a lot of working capital tied up in inventory built as companies imported goods in an attempt to get in front of the potential tariffs. Those were inventories that they otherwise would not have built.
The other point being that with this much long-term uncertainty, or this much opacity about where we are heading, is also preventing I think a lot of long-term planning. And to put a real world example on this, if you go back to the first Trump administration and his inaugural trade war with China, you saw an acceleration of a China-plus-one strategy, and a lot of movement in certain industries to move manufacturing out of China into a market like Vietnam. Well, in the world of the reciprocal tariffs, all of a sudden China might look in certain industries competitive again, and that decision that you made less than a decade ago doesn’t look as promising as perhaps it did at that time.
Michael Leiter (11:32):
Of course, if you made that choice and, more broadly a sector has made that choice to diversify supply chains from China, you might well be the sector of the company which is next targeted by the Chinese in all the ways that an authoritarian state can — economically, pressure, licensing and otherwise. So that choice might be beneficial in one country, but could have huge repercussions for you elsewhere in the world.
Ann Beth Stebbins (12:02):
So with all this uncertainty, lack of visibility, shifting sands, what’s a board to do? How does a board stay on top of this? How does a board exercise its duty of care and get all of the information it needs to make decisions when today’s information might be stale next week?
Kevin Kajiwara (12:25):
At a fundamental level, everything that Mike and I are talking about right now needs to be thought of when you’re thinking about your board composition. It’s not simply industrial expertise or economic expertise, international expertise. There are certain industries that grow executives that are very, very immersed in all of that, and I think we have real world examples of that, too. When you go rewind the tape to 2022 and Russia invaded Ukraine, there were certain companies particularly in certain industries like the extractive industries, as an example, that knew instantly, or very quickly, how they were going to respond. And a lot of other companies were not as well prepared because they didn’t have the previous experience with this type of an issue — the kind of war exposure — as extractive companies do.
Any institution over time will start to develop a sense of tunnel vision and myopia, and therefore it’s important to have outside perspectives brought in. I also think that boards should visit the international operations of their companies. I know that this is something that has been a challenge, particularly in the post COVID world, but it is particularly eye-opening.
And I think the last thing I would say, I do think that companies meaning the ELT and board alike can benefit from very robust scenario planning.
Ann Beth Stebbins (13:47):
Mike, do you see value in tabletop exercises, scenario planning? How do you scenario plan for the unknown?
Michael Leiter (13:56):
Yeah, absolutely. I think there’s a lot of value to that and Beth, and frankly, I don’t think every board should go out and hire two or three former congressmen and senators. I don’t think that’s what political risk is about. That’s what politics are about, but understanding how political risk will actually intersect with a sophisticated transnational business is really quite different.
So I think it is having people who understand uncertainty, having people who have been in industries that have always had to manage political risk. And then to your point, how do you use things like tabletop exercises to actually figure out how a company might or might not react when you know there’s uncertainty and you might have much more frequent and significant deviations, you actually do have to game out those risks that are unlikely, but big effects because we may have more black or at least gray swans from the political risk around the globe.
(14:56):
So then you really have to think about, not just, well, we might have to shift our supply lines out of this region. You really have to start pricing that you have to play through alternatives, how long it would take. I remember doing a war game for the U.S. government a while back regarding chip access out of Taiwan, and at one point I announced it was the worst war game ever because it turned out that for at least five or seven years there was nothing to do because that’s how long it took to build a new chip factory.
So you have to now use these scenarios to think through at a much deeper level what you would do if something very bad happens, which isn’t in my view what boards normally go through. So I need to start expecting that I’ve got an uncertain future ahead of me. So I think scenario planning for fleshing out timelines, costs, optionality are very important for boards.
Kevin Kajiwara (15:48):
There are different types of scenario planning exercises as well. You don’t need to game out every single scenario. We’re not going to come up with it. It kind of goes back to what General Eisenhower said about war plans, right? That when the first bullet flies, the plan goes out the window, it’s worthless, but planning was everything and allowed them to adjust and to pivot accordingly.
But there’s another type of scenario planning exercise that I think is also very worthwhile, and particularly in terms of the interaction between board and management, and that is the type where you use the opportunity to test the underlying assumptions that management is making their strategic decisions on. You bring in outside experts on the other side of the table. This is not an example of those outside experts pontificating to management and telling them what’s going to happen or who’s going to win the election or what the regulatory environment is going to look like. It is, let’s hear from management the fundamental assumptions that they are making about the operating paradigm and operating environment that they believe they are entering into for the next three to five years, and let’s test those. A successful scenario, exercise forces management to walk away from the table and say, you know what? I hadn’t thought about that. We need to incorporate this into our thinking.
Ann Beth Stebbins (17:07):
So should external risk assessment be an agenda item at every board meeting?
Kevin Kajiwara (17:12):
That the environment is shifting very, very rapidly here. And it used to be that because you could have faith in that underlying playing field, you might be able to test that every couple of years, or every election, every congressional election cycle. Now I think we need to test those assumptions much more frequently. I think the views are more nuanced than they were in, say, November of last year, and I think that needs to be tested with greater frequency, and again, to not spend all of that time focusing on just what’s coming out of Washington and out of this White House, because as we have seen, other political leaders around the world who do not telegraph their intentions as openly as President Trump does.
Michael Leiter (17:57):
I think it’s at least quarterly at this point. And for two specific reasons. First, management is getting absolutely bombarded on a daily basis with press clippings and announcements trying to figure out how to react and maneuver, and that’s exhausting. It’s incredibly important because of that to let the board in to talk about that risk and have the board help lift management’s eyes back up to see the horizon farther out.
So I think if you don’t do that quarterly, you’re not actually helping your management team think about these difficult scenarios that could evolve.
The second reason is whether you’re an American company, real multinational or your European company operating in the United States, other regions are going to have a counterreaction to what you do. So having that quarterly, not just to dive more into American politics and American political risk, but really get thoughtful insight into what the Chinese have been thinking, what the EU has been doing, what the U.K. is doing on these fronts in reaction, I think is very, very important to again, lift everyone’s eyes up from their most immediate surrounding thinking about the next level of risk.
Ann Beth Stebbins (19:19):
Which is why it’s so important to have the right people on your board. Going back to Kevin’s earlier comment, finding people who have dealt with political risk in the past because of the industries they come from.
So last topic I wanted to cover, and Mike, let me start with you. How should companies be communicating with their shareholders about these risks and should that be on a quarterly frequency as well. And how do you keep on top of it with that sort of cadence when you’re communicating externally?
Michael Leiter (19:53):
We certainly see a change in risk factors being issued quarterly, but I think given what we’ve described, which is a global scale of political risk and the much deeper effects that that political risk can have on a company today, I think it’s imperative on every board to go back through those risk factors and update them and show change. Because I mean, if boards don’t make changes to those risk factors, I think it’ll be running very much counter to a well-established public perception that political risk is up, showing reaction to circumstances. How these risk factors evolve is a critical point that you look at to understand that the board is engaged.
So given that obviously we think there is more political risk in the world, it’s more intertwined, it’s deeper, that should absolutely be reflected, at least at a very least an annual way. And certainly if you lie in the cross hairs as a very particular issue involving tariffs around steel and you’re reliant on steel, or fill in the blank with whatever tariff issue or excess technology could be, this is certainly something that might have to be updated even more regularly than that.
Kevin Kajiwara (21:12):
I agree with that a hundred percent. I would say that it has the benefit of not only demonstrating to the shareholders and broader stakeholder community alike that you are aware and .…
Ann Beth Stebbins:
And proactive.
Kevin Kajiwara:
Aware, proactive, take into consideration, and therefore able to support management in the right way. But it’ll have the added benefit, if you’re doing all that, you will actually be getting up to speed and being able to support the management to management better going forward.
There are certain industries, particularly those that are in highly sensitive areas in tech as an example, and in other areas that are deemed in national security interests of the country, that are going to pay a lot of attention to this and pay and devote a lot of time and word count to addressing it. I don’t think there’s any industry that remains untouched in a sense by this now, and I think there’s going to be an extra onus to get up to speed more quickly.
Ann Beth Stebbins (22:07):
I think it’s important for boards to be communicating with their shareholders as to how they’re addressing these risks because the investment community will be looking at the same risks and wanting to know how a company is responding.
Michael Leiter (22:22):
I think that’s exactly right, and it goes back to the point that Kevin touched on, we mentioned board composition. You think 20 years ago the idea of having someone who is a cybersecurity expert on a board was sort of laughable. And of course, many people now advise, and certainly investors expect it’s a risk factor if they don’t have it. I think political risk is going to be similar.
Now, again, it’s not as though you get a master’s degree in political risk or PhD, but having someone who on the board has some of the characteristics we’ve talked about — understanding of uncertainty, living in an environment which had significant political risk, people with significant international experience, given the competing political risk you have across borders — I think increasingly boards will be viewed as insufficient if they don’t talk about their membership in those ways.
Ann Beth Stebbins (23:18):
Well, Mike, Kevin, great conversation. I really appreciate you both joining us today, and thanks for being on The Informed Board.
Kevin Kajiwara (23:27):
It’s been a pleasure. Thanks very much for the time. Thank you,
Michael Leiter (23:30):
Ann, Beth and Kevin, great to do this with you.
Voiceover (23:32):
Thank you for joining us for today’s episode of The Informed Board. If you like what you’re hearing, be sure to subscribe in your favorite podcast app so you don’t miss any future conversations. Additional information about Skadden can be found skadden.com. The Informed Board is a podcast by Skadden ARBs, slate Mar and flm, LLP and Affiliates. This podcast is provided for educational and informational purposes only and is not intended and should not be construed as legal advice. This podcast is considered advertising under applicable state laws.
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