Stanford political scientists Condoleezza Rice and Amy Zegart offer insights about how businesses can most effectively confront “political risks” in an uncertain world where information for customers and clients is now at their fingertips.

While political risks have grown more complex, wisely managing them remains fairly straightforward, two Stanford scholars say.

Political scientists Condoleezza Rice and Amy Zegart explain how a company’s fairy tale can become a nightmare if it fails to take effective measures against “political risk,” the probability that an action or event will significantly affect business, positively or negatively.

For companies, political risk is defined as the probability that a political action will significantly affect their business – whether positively or negatively.

Whether those threats come from government, Twitter, terrorists or activists and hackers, the reality is that political risks can blindside even the best managers if preparatory measures are not taken, say Condoleezza Rice and Amy Zegart, two Stanford political scientists. They co-taught the Stanford MBA course, Managing Global Political Risk, to more than 200 students over the past six years, collecting case studies and research for their course.

Zegart, the Davies Family Senior Fellow at the Hoover Institution and co-director of Stanford’s Center for International Security and Cooperation, and Rice, the Thomas and Barbara Stephenson Senior Fellow at Hoover and a former U.S. secretary of state, feature their findings in the book, Political Risk: How Businesses and Organizations Can Anticipate Global Insecurity. Rice is also the Denning Professor in Global Business and the Economy at the Stanford Graduate School of Business.

Drawing on social science research, interviews with industry leaders and their own experiences, Rice and Zegart explain why political risk is so hard for all organizations to see. They provide detailed examples of best practices and cautionary tales in risk management from leading businesses as well as insights from aircraft carrier operations, NASA’s space shuttle program and professional sports teams.

Political Risk offers a new approach for anticipating, analyzing, mitigating and responding to possible threats that can be applied in any organization.

In an interview, Zegart said that such risk is no longer just about a foreign country’s tax system, regulatory environment or threat of expropriation.

“Instead, security challenges – wars, civil unrest, cyberthreats, terrorism and insurgencies – pose risks and opportunities for global organizations and businesses, which could have catastrophic or – if well handled – beneficial consequences,” Zegart said.

At the same time, globalization and social media have given local people everywhere an ability to spread messages and join in common causes around the world. As a result, politics in one location can have cascading effects elsewhere – whether it’s the spread of Tunisian protests in the Arab uprisings or a campaign to ban the sale of “conflict diamonds” from war-torn African countries.

From fairy tale to nightmare

Consider SeaWorld, the theme park company that in 2013 had just completed an initial public offering that exceeded expectations, raising more than $700 million in capital and valuing the company at $2.5 billion, according to Rice and Zegart.

Eighteen months later, SeaWorld’s fairy tale had become a nightmare. The stock price had plunged 60 percent and top management resigned. Why? A low-budget documentary film examined the treatment of the company’s famed killer whales. Soon, news headlines were excoriating the company, with pressure growing on public officials to regulate the handling of killer whales. Amid the backlash, SeaWorld’s stock fell from $38.92 a share to $15.77 in 2014 – and it has not recovered.

So, how can companies and organizations best manage political risk in our current environment of rapid information? Rice and Zegart suggest a new “framework.”

Understand risks: Companies need to evaluate what their appetite is for political risk. For example, while oil and gas companies undertake long-term investments in distant countries, they might be willing to tolerate more risk than more retail-oriented industries, such as hotel chains and theme parks, that face customers on a daily basis.

Also, they should ask: What is their company-wide understanding about the tolerance of risk? Rice and Zegart suggest companies encourage creative thinking to guard against “blind spots” or groupthink” when it comes to judging risk factors.

Analyze risks: Getting good information about political risks and conducting objective reviews and analyses of those challenges is important, Rice and Zegart wrote. That research can be used to make wiser business decisions grounded in reality. “Getting managers to use rigorous political risk analyses – of any variety – to defend investments can significantly improve decision-making.”

Reduce risk exposure: Organizations need to ask themselves how they can decrease their susceptibility to identified political risks. Also, do good systems and teams exist that can react and handle situations on a timely basis? Also, Rice and Zegart noted, managers can take steps to minimize potential damage long before a crisis unfolds if they plan properly and foresee the likely risks.

Respond to risks: Organizations can learn from incidents where something may have gone wrong. They can use such knowledge to respond more effectively to future crises. “Leaders must react and correct for the human tendency to ascribe close calls to a system’s resiliency when it’s just as likely the near miss occurred because of a system’s vulnerability,” according to Rice and Zegart.

They provide as an example of a wise approach a toy company that in 2006 created a strategic risk management system that helped align views on risk across the company. Leadership set up systematic processes for training all new managers about risk; engaging every important business leader, including the board members, in setting the risk appetite; identifying risks; and integrating risk assessment and reduction into business planning.

They also pointed to a hotel chain that now has a sophisticated security alert system. While the company acknowledges it doesn’t know when or where terrorists may strike next, it has increased preparedness and safety measures in every hotel. The company achieves this by notifying hotel managers about changing conditions that might pose a threat and informing employees what to do in potential cases of risk.

“In the end,” Rice and Zegart write, “the most effective organizations have three big things in common: They take political risk seriously, they approach it systematically and with humility, and they lead from the top.”

This interview originally appeared in the Bulletin of the Atomic Scientists March 9, 2018.

It was an extraordinary week in North Korean nuclear affairs. First, high-level South Korean envoys met with the North’s leader Kim Jong-un, returning to Seoul with promises of an inter-Korean summit and other seemingly conciliatory statements. That news was quickly eclipsed, though, when later in the week, one of the South Korean envoys turned up in Washington with a personal invitation from Kim Jong-un to US President Donald Trump to meet him in Pyongyang. Trump agreed to meet “at a place and time to be determined.” It would be the first-ever meeting between a sitting US president and a North Korean head of state. But just as everyone was getting their heads around the idea that these two leaders—who just last year were threatening each other with nuclear destruction—would soon meet face to face, the White House added a caveat. On Friday, Press Secretary Sarah Huckabee Sanders said Trump would only attend if North Korea first took unspecified “concrete and verifiable steps.” In case your head isn’t spinning yet, a Wall Street Journal reporter later tweeted that a White House official told him “the invitation has been extended and accepted, and that stands.”

As the Trump White House broadcast its internal confusion, the Bulletin turned to someone who could give the longer view. Siegfried S. Hecker is the former director of the Los Alamos National Laboratory and has visited North Korean nuclear facilities multiple times. We published several interviews with him as North Korea developed its nuclear program last year. (For his in-depth takes on Pyongyang’s recent weapon testing, see here, here, and here.) We asked him what he made of this week’s events, and what they bode for the future.

BAS: Not so long ago, Trump and Kim were trading mockery and threats of nuclear annihilation. In our September 2017 interview, you recommended that Washington dispatch a team to talk to Kim to establish lines of communications and avoid a nuclear catastrophe. It was envoys from South Korean President Moon Jae-in, though, who seem to have broken the stalemate by acting as Pyongyang-Washington intermediaries. Are you surprised that Seoul was able to take on this role? And what do you think of Trump accepting the invitation to talk directly to Kim?

SH: Nothing short of amazing. I did not expect Kim Jong-un to be willing to talk to Seoul first. It was a very clever move on his part to take advantage of Moon’s desire to engage diplomatically and help ensure a peaceful Olympic games. Kim’s invitation to Trump is not so surprising, since he had given hints of being ready to talk, and Moon teed this up nicely. The most surprising part is Trump’s acceptance.

BAS: Let’s get to Trump in a minute. First, how had Kim signaled that he was prepared to talk?

SH: Kim Jong-un gave hints of a diplomatic initiative in his New Year’s message. He announced in early January, “we achieved the goal of completing our state nuclear force in 2017,” and added, “the entire area of the US mainland is within our nuclear strike range, and the US can never start a war against me and our country. These weapons will be used only if our security is threatened.” So, he opened the door for dialogue, and followed up by sending a team to the Olympics along with a high-level delegation that included his sister.

BAS: What did Kim Jong-un tell the South Korean envoys to Pyongyang on Monday?

SH: Kim said that the North would have no reason to possess nuclear weapons if the security of its regime could be guaranteed and military threats against North Korea removed. Moreover, he expressed willingness to talk to Washington on denuclearizing the peninsula and normalizing bilateral ties, and to do so without pre-conditions. He also agreed to a moratorium on missile and nuclear testing while Pyongyang and Washington talk. Kim even said he is willing to accept the joint South Korean-US military drills as a reality. The North has objected vehemently to these in the past.

BAS: Why would Trump accept an invitation to a summit now, when last fall he threatened Kim with fire and fury and the total destruction of North Korea?

SH: We may have an unusual confluence of events. As well as issuing those threats, Trump widely broadcast that he was considering preventive military strikes, and also urged what he calls maximum pressure, both economic and political, on North Korea. He can claim, perhaps even with some justification, that his policies and actions brought Kim Jong-un to the diplomatic table to discuss denuclearization. Kim, on the other hand, can tell his people that he is coming to negotiations from a position of strength now that he has intercontinental ballistic missiles (ICBMs) and can threaten the United States. In other words, both can declare victory.

BAS: Kim claims that all of the United States is within nuclear strike range, but you said in September that it would take another couple of years before North Korea could hit the US mainland. What has changed?

SH: North Korea successfully launched its largest missile to date, the Hwasong-15 ICBM, on November 29th. It was an impressive feat. Yet it was launched on a highly lofted trajectory to fly high rather than far. One rocket test does not constitute an operational ICBM fleet. Besides, they have yet to demonstrate that the nuclear warheads that would be mounted on this—or its sister Hwasong-14—can be made sufficiently small, light, and robust to survive a fiery reentry into the atmosphere. It still needs to do more missile and nuclear tests. But if Kim tells his people that they can threaten the United States, let’s not argue too much.

From my perspective, there is no imminent threat that a North Korean nuclear-tipped missile will detonate on American soil. However, Kim does deter the United States because he likely has shorter-range nuclear-tipped missiles that can reach all of South Korea and Japan. That alone should deter Washington from military action against North Korea, because they can inflict unacceptable damage to US assets and allies.

BAS: Is the inter-Korean summit that the North and South agreed to earlier this week a good idea? What about the Kim-Trump summit that now seems likely?

SH: The inter-Korean summit is a good idea. It is what South Korean President Moon wants in order to pursue peace on the Korean peninsula, and he has an experienced team in place. The initial visit to Pyongyang by the South Korean envoys has already told us more about Kim than we have learned over the past six years. It moved us at least one step away from the nuclear brink.

The Kim-Trump summit is also welcome, because it has the potential to move us much farther away from the brink and toward an eventual peaceful resolution to the nuclear crisis on the Korean peninsula. But while it offers many opportunities, it also presents serious challenges.

BAS: On Friday, the White House press secretary seemed to waffle on whether Trump was really accepting the invitation to Pyongyang, saying the United States would require North Korea to take “concrete and verifiable steps” before a sit-down with Kim. Any idea what those might be? Is this a White House effort to keep its options open?

SH: I really don't know. If she was referring to the points that Kim agreed on with the South Korean envoys, the only one that would require action is refraining from missile and nuclear tests. This is verifiable, and of course, should the North conduct such tests, there should be no meeting.

BAS: If talks go forward, does the Trump administration have an experienced team in place? If the meeting is to take place by the end of May, as has been proposed, does the United States have sufficient time to make the best of the opportunity?

SH: The administration’s diplomatic team is understaffed and lacks people who have experience negotiating with North Korea. Time is very tight, especially since these efforts were not preceded by lower-level diplomatic engagement. The administration would be well advised to call on experts outside of government who have diplomatic and technical/military experience in Korea.

BAS: What do you see as the biggest challenges?

SH: In spite of the willingness to talk by both sides, Washington and Pyongyang have dramatically different views on what brought us to this nuclear crisis. It will take a long time and tedious negotiations to resolve. The best we can hope for at this time is for the leaders to reach an understanding that they must avoid war. To do so, they must lower tensions and establish mechanisms to avoid misunderstandings. The Trump administration must enter the summit with the understanding that it represents the beginning of a long journey, not the end destination. Even if an agreement is eventually reached, it will be the follow-through and implementation that determine its success. Washington has done very poorly on both over the years.

BAS: There’s a lot of speculation about why Kim Jong-un chose now to talk. Some think the US and UN sanctions were biting hard, but others say his move was taken right out of his father’s playbook. That is, that he is offering a dialogue on arms control to wrest concessions and aid from Washington. Or, he may be buying time to enhance his nuclear arsenal. Or, he is very cleverly trying to drive a wedge between South Korea and the United States. What do you think?

SH: To sort this out requires a comprehensive understanding of both political developments in North Korea over the last 25 years and the growth of its nuclear and missile programs. We are working on that. For now, let me offer one other possibility. Kim may simply be following through on what he laid out in March 2013. He said that North Korea plans to follow a dual-track policy, featuring both military and economic development. His nuclear and missile developments in 2017 may have provided him with sufficient security to allow him to turn to economic development. And economic development will require a link to the international community and at least for now that link goes through Washington.

BAS: In the United States, many responses to the potential summit have been cautious, skeptical, or downright negative. Are you surprised?

SH: Many in the US government and much of the US news media have demonized North Korea’s leaders, and in fact the entire country. So the general public mood is conditioned to be negative or at least skeptical about anything proposed by the North. Moreover, some of the public is concerned that Washington doesn’t have the wisdom and staying power to pull this off.

Although I don’t think we are on the verge of solving the North Korean crisis, Kim’s initiative and Trump’s willingness to meet must be viewed as serious moves to lower tensions on the Korean peninsula. They are welcome steps away from the brink of nuclear war. Now, the hard part begins.