Leadership lessons in a fragmented world

The world needs coordinated governance to counter the many complex risks that stretch across national boundaries. Unfortunately, today’s increasingly fractured geopolitical environment threatens to undermine our ability to deal with these shocks and could impede progress in industries critical to global economic development: financial services, healthcare and energy.

Banks are exiting markets and repatriating trillions of dollars to escape new national regulatory schemes that are ring-fencing their capital. International pharmaceutical companies are struggling to take new technologies into different markets as governments apply pressure to lower pricing in their countries. At the same time, the shifting geopolitics of energy supply is creating uncertainty for investors at a time when nearly $27 trillion in investment is needed to respond to escalating global demand for electricity alone.

National self-interest is becoming the overriding priority as developed nations focus on finding solutions to their weak fiscal positions and emerging countries make greater efforts to meet the rising expectations of growing middle classes. As a result, multilateral institutions struggle to build consensus across countries and we are not undertaking concerted action on critical global challenges like climate change, governance of the Internet and illicit trade, according to the 2014 edition of the World Economic Forum’s Global Risks 2014 report, to which Marsh & McLennan Companies contributed.

In the near term, domestic pressures are likely to grow – leading to an even more insular focus. In 2013, millions of people took to the streets in Ukraine, Argentina, Turkey, Egypt and Brazil to protest against everything from their nation’s leadership to a five-cent increase in bus fares. In this unstable geopolitical climate, interstate frictions are likely to sharpen and the global business landscape could be significantly altered.

So what can be done by business leaders facing this environment? We must follow two parallel tracks. Business leaders should work together with political leaders to strengthen some of the critical multilateral institutions needed to mitigate the risks emerging from a more fractured context. At the same time, they should adapt their strategies to the emerging landscape to capitalize on new opportunities created by the changing geopolitical outlook. This could mean forging new cross-border partnerships that span the interests of both the public and private sector.

Governments and companies should take a page from the Global Alliance for Vaccines and Immunization (GAVI) coalition, formed by the Bill & Melinda Gates Foundation, non-profit organizations, governments and the pharmaceutical industry with the aim of immunizing 250 million children and saving 4 million lives by 2015. Creative public-private partnerships could also halt rising medical costs if systematically applied toward developing solutions to growing challenges such as Alzheimer’s and championing a global movement to low-cost healthcare models that reward healthcare providers based on their ability to keep patients well rather than on the number of procedures they perform.

In the energy sector, the deep interconnection between geopolitics and business is already taking a new turn due to major shifts in both supply, thanks to shale gas discoveries in North America, and demand in rapidly growing markets such as those in Asia. Looking ahead, national oil companies will expand their reach, using the political and financial backing of their home governments, and energy companies will need to consider new partnerships with them as their market involvement escalates. Rapidly evolving changes will create growth opportunities for some players such as companies with sophisticated trading platforms that can acquire and re-route cargoes for commercial advantage. Interstate supply dependencies will also create heightened demand for energy efficiency in all countries – an area where joint ventures and other multistakeholder partnerships could be very beneficial.

Finally, in the financial sector, global banks should work with regulators across countries to try to overcome the current “balkanization” of domestic reforms that are creating both cost and capital inefficiencies that work against long-term economic growth. New forms of public-private cooperation could also stimulate development. For example, we estimate that a more coordinated and integrated Asian financial system could generate an incremental GDP uplift of more than 0.5% on an annual basis by 2020 and transform the sector from a bank-dominated model to a more balanced structure with deeper and wider capital markets.

National retrenchment is more likely to increase global risks rather than mitigate them. Succeeding in a fractured geopolitical environment will require flexibility, foresight and fresh thinking about risk management. In the face of this emerging context, the agile and adaptable are most likely to thrive.

Read the Global Risks 2014 report.

Author: John Drzik is Chairman of the Global Risk Centre at Marsh & McLennan Companies..

Image: An activist burns a flare as he takes part in a rally in Kiev, Ukraine, on January 1, 2014. REUTERS/Maxim Zmeyev