RISK ANALYSIS CAN HELP PREVENT ACTIONS THAT ADVERSELY AFFECT, DISRUPT, OR STOP OPERATIONS
JAMES R. SISCO AND EMMA MOORE, ENODO GLOBAL, ALEXANDRIA, VA.
SOCIAL RISK is not a new phenomenon and is increasing as globalization and new communication technologies connect diverse individuals and communities. In fact, social risk pre-dates and encompasses most contemporary risks.
While most multinational corporations (MNCs) attempt to mitigate technical, economic, reputational, and environmental risk, it is social risk that fuels these contemporary risks. However, social risk is ambiguous, ill-defined, mistaken for geopolitical risk, and a relatively new concept for MNCs. And unlike most contemporary risks that focus on a specific topic or interest, social risk has broad implications and the potential to impact investments up and down the supply chain, with varying degrees of severity.
For MNCs, social risk is most commonly associated with geopolitical risk. Geopolitical risk is defined as the study or application of the influence of political and economic geography on the politics, national power, and foreign policy of a state. For MNCs, geopolitical risk provides a framework to manage risk based on past events in order to predict and influence the future. It typically relies on statistical-based analysis that uses a value system expecting continued and repeated events. This method prevents it from incorporating contemporary social risks and does not allow for prediction of irregular occurrences and new patterns of conflict.
Today's social risks are dynamic - the majority of which emanate from individuals, communities, activist networks, and terrorist groups. Geopolitical risk practically endorses social risk in acknowledging that modern conflicts originate not from states but non-state actors, who use narratives to garner support among local and regional populations.
Geopolitical risk was not designed for and cannot forecast these types of risks. It typically focuses on the company's or government's concerns while systematically overlooking the needs of the local population. Therefore, non-state actors render traditional geopolitical analysis and MNC countermoves - trade restraints, bilateral investment treaties, and private security - irrelevant.
As conflict shifts to non-state actors, communication technology becomes a tool with which to construct and quickly disseminate narratives. Social media is the platform most frequently used to mobilize and empower individuals, communities, activist groups, and terror organizations. The power of social media to raise and amplify voices and opinions makes social risk increasingly relevant.
Social risk takes geopolitical risk to a new level. Social risk addresses realities and information on the ground to recognize opportunities and challenges before they happen. Geopolitical risk's narrow focus merely mows the lawn, while social risk uncovers and attacks the roots of insecurity. Moreover, social risk analysis broadens the limited focus of geopolitical risk through exploration of local and regional truths: a nuanced conceptual framework that includes a variety of sources and narratives to fully understand scope. Social risk is not theoretical. It illuminates actionable issues to understand, forecast, and prevent contemporary risk that impact the bottom line.
Private companies that specialize in social risk analysis have also developed operating systems and methodologies to identify, forecast, and counter the negative consequences of social risk. These efforts expand the limited success of geopolitical risk to forecast and prevent problems via social risk strategies.
The impact and implications of social risk on MNC investments and operations is rarely understood or quantified in investment models or on the bottom line. Each day, examples of social risk occur across the globe, with some causing significant financial losses for MNCs. Whether regulatory, environmental, geopolitical, or country, each type of risk is influenced, directly by social risk.
Political risk poses severe consequences for MNCs, which often spend years and millions of dollars cultivating relationships with senior officials. Overnight, such a relationship can be jeopardized by local changes: political transformations in underdeveloped countries are a frequent occurrence and are typically caused by popular uprisings due to social unrest.
Since 2005 there have been more than 90 popular uprisings in more than 40 African states with 26 occurring in 2011 alone. The trend is growing. In Burkina Faso, after 27 years in power, Blaise Compaoré was forced into exile due to a popular uprising over plans to change the constitution. He was not alone. African leaders removed from office by popular protests include: Egypt's Hosni Mubarak, Tunisia's Zine el-Abidine Ben Ali, and Senegal's Abdoulaye Wade. This list will continue to grow with Uganda's Yoweri Museveni, Zimbabwe's Robert Mugabe, and Sudan's Omar Hassan al-Bashir under pressure from popular protests.
Regulatory risk - the possibility of a change in law or regulations that could negatively influence a company - is often caused by citizens advocating for change or a central government attempting to raise new investments. In 2014 social risk directly impacted regulatory risk when Kenyan officials - pressured by local community leaders - implemented a local community tax on mining investors exploiting minerals in the country.
Despite the central government's disapproval, legislation was enacted that created a direct source of revenue for communities at the expense of the mining companies operating in the region. This regulatory shift could have been foreseen and mitigated at a significantly lower cost had there been greater understanding and emphasis placed on the social risk environment.
Environmental risk is caused by changes in output, emissions, wastes, or resource depletion and is primed for the regulatory backlash and production stoppages due to protests. Construction of the Minas Conga gold and copper project was suspended in late 2011 due to violent protests from the indigenous populations in Cajamarca, Peru. The protests were backed by Cajamarca's Governor Gregorio Santos, environmental non-government organizations (NGOs) and radical groups, including the leftist Chavistas, which focused on environmental issues -specifically water contamination and depletion - to stir unrest within the communities surrounding the site.
The Peruvian government declared a state of emergency even though the project had undergone extensive reviews by government agencies and was approved by the mines and energy ministry following a three-year, public Environmental Impact Assessment (EIA) process. As a result, one of Peru's biggest mining investment projects, Newmont Mining and Buenaventura's US $4.8 billion mine project continues to be on hold due to the unresolved social conflict.
A combination of political and environmental risk impacted by social risk is illustrated by the Keystone XL pipeline project. The issue has metastasized from local protests in the states the pipeline would cross (Montana, South Dakota, Nebraska, Kansas, Oklahoma, and Texas) to one hotly debated for the 2016 presidential election.
Concerns about a spill's environmental and economic fallout, tar sands, and "dirty oil" has led to numerous activist groups, petitions, and protests. The billions of dollars invested in this project by Keystone are threatened by local organizers who have brought the project to national and political attention. Social risk has delayed construction of the Keystone Pipeline for over seven years, increasing estimated costs from $100 million to $5.4 billion dollars.
Although more prevalent in underdeveloped countries, social risk occurs quite often domestically. Bostonians thwarted an Olympic bid over disagreement with the bid's "blank check" component that requires a host city to cover Olympic deficits. The opposition group was comprised of an all-volunteer force with a shoestring budget that leveraged social media to mobilize constituents and defeat the city's bid. The group disagreed with the city's bid for excluding improvement to transportation or other infrastructure changes.
Holding Boston taxpayers accountable for Olympic deficits and failing to hear their requests for specific city-wide improvements beyond stadiums and velodromes eliminated Boston from participating in the Olympic running. More recently, Greenpeace and local activist protested in Seattle and Portland to delay Shell's Arctic drilling project with "kayactivists" and bridge obstruction, resulting in delays to a multimillion dollar drilling project in the Arctic.
MNCs now operate within dynamic, complex social environments instead of clearly defined nation-states, often without clear consent on the part of citizens. To effectively operate in these environments, MNCs must broaden their risk portfolios and develop strategies that evolve at the same pace as the changes in society. This includes integrating social risk analysis.
The role of social risk analysis is to enhance stability and security by concentrating on individuals and communities. Recognizing social risk factors enables MNCs to avert groups from adversely affecting, disrupting, or stopping operations through litigation, strikes, protests, sabotage, and violence. Non-state actors require attention; social risk analysis addresses such influence upon company's operations in order to protect company investments.
ABOUT THE AUTHORS
James R. Sisco (US Navy, retired) is the founder and president of ENODO Global Inc., a risk advisory firm that conducts population-centric analysis to solve complex social problems in dynamic cultural environments.
Emma Moore is an international relations specialist with a focus on security and Latin America, which includes community-level experience on the role of women, peace, and security efforts as well as war psychology.
