The Dangers of Assessing Risks Through a Political Lens

Earlier this year, I wrote how the Uber phenomenon should raise awareness of the risks associated with disruptive innovation. I noted that deciding whether Uber fits the textbook definition was not as important as understanding the risks associated with it.

I have since been struck by the growing chorus around potential business risks that do fit more closely with disruptive innovation’s definition – the U.S. presidential campaigns of Donald Trump and Bernie Sanders. Disruptive innovation keys on an upstart competitor that taps into an unserved or underserved market. The Trump and Sanders campaigns appear to be doing just that.

I’ll leave it to the political pundits to determine if the campaigns truly represent innovation, and I am not weighing in here on one side or the other of either of these campaigns. But it is clear that these unconventional politicians have tapped into a vein of discontent within the U.S. electorate. As I mentioned, I generally don’t comment on politics, but I do believe it is important for internal auditors to understand that politics can impact business risks.

The reality is that even speculation over a U.S. presidential campaign can affect global markets. That’s why the issue of who will become the next U.S. president is of keen interest to stock market traders and economists around the globe.

But Trump and Sanders have taken such speculation to historic levels. Some suggest that the radical political platforms these men have laid out could disrupt global trade, tax structure, foreign relations, security and more.

Both candidates, for example, have discussed pulling back on free-trade agreements, including boosting tariffs on Chinese goods and dumping the pending Trans Pacific Partnership agreement. All this would increase risks to key industries.

In a February Forbes magazine column, the chairman of the Global Business Policy Council shared a preview of the 2016 Foreign Direct Investment Confidence Index. Early numbers suggested a Trump or Sanders presidency would hurt foreign investment in the United States, which has averaged USD$220 billion annually for the past five years.

The index, which is based on a survey of more than 1,000 global business executives, predicts that, should either man be elected, the number of companies boosting investments in the United States would drop 13 percentage points, while the number reducing investments in the United States would increase 8 percentage points.

But I wonder if some are taking the risk prospects too far?

The Economist Intelligence Unit’s Global Forecasting Service made headlines worldwide when it ranked a Trump presidency as the sixth greatest global risk to business. It was rated on par with jihadi terrorism destabilizing the global economy and ahead of the United Kingdom leaving the European Union!

I’ve said before that risk assessment is as much art as it is science. There is always a subjective component to risk assessments, and subjectivity is never more evident than when issues are viewed through a political lens. Risk professionals and internal auditors should be leery of global risk assessments that predict doom and gloom if the American electorate speaks its collective voice and elects any given candidate.

Ultimately, putting a high risk rating on a Trump or Sanders presidency is a slap in the face of the U.S. system of government. The United States has a process of checks and balances — validated over more than 200 years — that doesn’t allow any single individual or branch of government to run the ship of state onto the rocks. Anyone who discounts that doesn’t appreciate the U.S. system of government.

As always, the contents of this blog represent​ my own personal views. I welcome yours.