THE BLOG
07/26/2011 12:57 pm ET Updated Sep 24, 2011

Business Must Consider the Political Risk from Unknown Unknowns

What and where is the next political risk? A few months ago it seemed almost impossible to predict that a political battle over raising the U.S. federal debt ceiling would create such headlines and anguish. Looking abroad, who would have predicted Middle East regime change by popular uprising? There are doubtless many such "unknown unknowns" that will unfold to our surprise.

How should business leaders respond to the political risk of unknown unknowns? There are the standard general strategies of insurance, hedging, and diversification, among others, but these may not be adequate for a particular business if mechanically applied. What is required is an active and creative risk management committee that contemplates "Black Swan" events in light of the unique vulnerabilities of the particular business.

To what extent is your business dependent upon the stability of a particular nation, currency, or political party? Recognizing that dependency, what are the likely business consequences of "unthinkable" radical and rapid change? How may your business best prepare for a "thousand-year flood" in the political arena?

There may not be more unknown unknowns but the speed and interconnected manner in which political events unfold has accelerated. There is seemingly less response time once the dominoes begin falling. Our global environment makes fewer political events isolated occurrences. Consequently, risk managers must have plans and resources in place in advance. There is no substitute for broadly based creative forethought coupled with wise planning.