We’re living in an era of constant disruption. Wars, sanctions, cyberattacks, political instability: what once felt like distant headlines now have direct consequences for your business. Supply chains are under pressure, regulations shift overnight, and reputation can be lost in a single misstep.
This is geopolitical risk. And it’s no longer something boards can afford to treat as background noise. So, what does that mean for directors?
In this article, we’ll walk you through the essentials. We’ll define what geopolitical risk really is, explore the types of threats boards should be paying attention to, and show how leading companies are staying one step ahead.
- What is geopolitical risk?
- What is the Geopolitical Risk Index and how should boards use it?
- What types of geopolitical risks should be monitored today?
- How does geopolitical risk affect supply chains?
- What is the role of directors in managing geopolitical risk?
- How can boards assess geopolitical risk effectively?
- What tools and practices support effective geopolitical risk management?
What is geopolitical risk?
Geopolitical risk is exactly what it sounds like: the uncertainty that arises when political forces, across or within borders, disrupt the way the world works. We’re talking about armed conflict, diplomatic tensions, economic sanctions, regulatory shakeups, even large-scale migration driven by climate change.
For businesses, these risks show up in very real, tangible ways. They often manifest through challenges such as:
- Regulatory pressure, like sudden shifts in trade policy, ESG rules, or foreign investment restrictions.
- Operational disruptions, from border closures to unrest that halts production or delays shipments.
- Reputational fallout, especially if your company is seen as connected to unstable regimes or slow to act in crisis situations.
- Market volatility, where currency swings or commodity price spikes hit your bottom line overnight.
In today’s interconnected economy, even distant political developments can trigger immediate consequences. That’s why boards must treat geopolitical risk not as a peripheral concern, but as a core business issue that directly impacts performance, continuity, and long-term value.
What is the Geopolitical Risk Index and how should boards use it?
The Geopolitical Risk Index (GPR) is a tool created by two economists at the U.S. Federal Reserve to measure how much geopolitical risk is dominating the global conversation at any given time. It does this by tracking how often terms like “war,” “terrorism,” or “military escalation” appear in major international newspapers.
The idea is simple: the more these topics show up in the media, the higher the level of global uncertainty. Not surprisingly, the index has spiked during major events like the world wars, the Cuban Missile Crisis, and 9/11.
For boards, the GPR can be a helpful signal. It won’t tell you what’s going to happen next but it can alert you when geopolitical tensions are rising and give you a broader sense of where the world is heading.
It’s especially useful for:
- Keeping a pulse on the global risk climate;
- Stress-testing your assumptions, and
- Timing big decisions with greater awareness.
What types of geopolitical risks should be monitored today?
Not all risks carry the same weight or likelihood. For boards, the challenge is to distinguish between noise and what truly matters: the fast-moving geopolitical shifts that can reshape strategy, operations, and long-term positioning.
Here are six of the most critical geopolitical risks directors should monitor closely:
1. Armed conflicts
Wars and regional violence can shut down production, displace employees, disrupt trade routes, and trigger secondary crises like energy shortages or refugee flows.
For example, the war in Ukraine disrupted access to critical exports like grain and fertilizer, while also rerouting energy supplies across Europe. Meanwhile, the conflict in Sudan has halted major mining operations and blocked trade routes in East Africa.
2. Economic nationalism
More governments are prioritizing national interests through policies that restrict foreign investment, favor local players, or increase scrutiny of cross-border mergers and acquisitions. For instance, India’s push for self-reliance in technology has led to new import restrictions.
3. Sanctions and export controls
Sanctions are no longer limited to countries, they now target individuals, institutions, and technologies. For global businesses, one regulatory change can trigger a cascade of legal, financial, and ethical dilemmas. Even indirect exposure like having a third-tier supplier in a sanctioned region can create compliance risks.
4. State-sponsored cyber attacks
Cybersecurity is no longer just an IT concern. Many attacks today are geopolitical in nature, launched or supported by state actors targeting critical infrastructure, financial systems, or intellectual property. These attacks often coincide with diplomatic tensions and can paralyze operations or compromise sensitive data.
In 2021, the Colonial Pipeline ransomware attack, widely attributed to hackers with ties to Eastern Europe or Russia, temporarily shut down fuel distribution in the U.S. Southeast. These incidents coincide with diplomatic tensions and can paralyze operations or compromise sensitive data across borders.
5. Climate-driven instability
Water scarcity, food insecurity, and climate migration are already fueling political unrest in parts of the world. As governments respond with new regulations, resource controls, or border restrictions, companies will face rising pressure to adapt supply chains, revise ESG commitments, and operate in increasingly unstable regions.
6. Trade wars and tariffs
Trade tensions between major economies, like the U.S. and China, can reshape global pricing structures, impact raw material availability, and force companies to rethink sourcing strategies. Sudden tariff hikes or retaliatory policies can render existing supply chains unviable, especially for industries reliant on cross-border manufacturing.
Given how vulnerable global operations have become, it’s worth taking a closer look. Let’s talk more about supply chains.
How does geopolitical risk affect supply chains?
Geopolitical supply chain risk refers to the exposure companies face when political events in one part of the world affect their ability to move goods, access materials, or meet production timelines. And because modern supply chains are deeply interconnected, often spanning multiple countries and jurisdictions, disruption in one link can ripple across the entire network.
For example, a new export control on semiconductors in Asia, a sudden tariff hike between major economies, or civil unrest affecting port access in Latin America can delay shipments, raise costs, or force last-minute supplier changes. The war in Ukraine is a striking example. When Russia blocked Black Sea shipping lanes, over 100 cargo ships were stranded, halting the export of key goods like grain. Exports dropped by more than 80% in the early months of the war, triggering global shortages and rising food prices.
The ripple effects extended beyond agriculture. Energy sanctions forced Europe to quickly diversify suppliers of oil, coal, and LNG, with the U.S. and India stepping in. These shifts led to higher costs and required a full rethinking of established logistics routes.
Events like these show how geopolitical volatility—whether in Eastern Europe, the Middle East, or the Taiwan Strait—can upend supply chains, strain margins, and require rapid, strategic adaptation from leadership teams.
To manage this exposure, leading companies are investing in:
- Diversified sourcing strategies that reduce reliance on high-risk regions.
- Dual or multi-supplier models to maintain flexibility in times of disruption.
- Nearshoring and regionalization to shorten lead times and increase control.
- Real-time monitoring systems to detect disruptions early and adapt quickly.
Boards play a critical role in overseeing supply chain resilience, especially as geopolitical volatility puts increasing pressure on global operations.
Learn more on how to strengthen your supply chain strategy and stay resilient in a shifting global landscape.
What is the role of directors in managing geopolitical risk?
In today’s volatile world, geopolitical risk is a strategic concern that demands active board-level engagement. Directors have a responsibility not only to understand these risks, but to ensure they are addressed systematically across the organization.
This starts with elevating geopolitical risk to a standing item on the board agenda not just during moments of crisis, but as part of long-term strategic oversight. Directors should push for better visibility into where the company is exposed, how scenarios are being evaluated, and whether the organization has the capabilities and culture to respond when disruptions arise.
They also play a key role in challenging assumptions. Are we too reliant on a single region or supplier? Are we prepared for rapid regulatory changes? How are geopolitical shifts influencing our ESG priorities or investment decisions?
Being an effective board today requires geopolitical fluency. Not deep expertise, but a working understanding of the forces shaping the company’s external environment. It also requires the confidence to ask sharp questions, promote cross-functional dialogue, and hold management accountable for building resilience.
When directors step into this role, they help shift the organization from reactive to strategic, turning geopolitical awareness into a source of long-term advantage.
How can boards assess geopolitical risk effectively?
Understanding where exposure lies is only the beginning. Boards must also ensure the business is continuously identifying, prioritizing, and planning for the threats that matter most.
This means moving beyond surface-level monitoring or reactive updates. It requires structured, organization-wide geopolitical risk analysis and board oversight that asks the right questions at the right time.
Here are some of the most important questions directors should bring to the table:
- What are the most critical geopolitical risks we face today, and how do they impact our key operations?
- How exposed are we to regulatory shifts or foreign policy changes in our key markets?
- Who is accountable for monitoring, reporting, and responding to geopolitical developments?
- Is geopolitical risk integrated into our enterprise risk management (ERM) framework?
Asking the right questions is just the start. To move from reaction to foresight, boards also need the right tools, let’s explore them.
What tools and practices support effective geopolitical risk management?
To support a more proactive approach, best-in-class organizations adopt a comprehensive set of tools and practices that embed geopolitical risk management into every layer of the business. These measures help leadership teams anticipate disruption, respond quickly, and make more resilient strategic decisions.
Integration into enterprise risk management (ERM)
Geopolitical risks are most effective when they are part of the broader enterprise risk management framework. Leading companies consider them alongside financial, operational, and cybersecurity risks. This ensures that political volatility is taken into account during strategic planning, capital allocation, and business continuity efforts. Boards gain a more complete understanding of how these risks could affect the organization.
Dedicated ownership and accountability
Managing geopolitical risk requires clearly defined responsibilities. Top-performing companies assign this role to dedicated teams such as global affairs units, risk committees, or cross-functional task forces. These teams monitor developments, coordinate internal responses, and report to the board regularly. This structure helps ensure no warning signs are missed and responses are timely and coordinated.
Real-time intelligence and monitoring
Geopolitical risk is constantly evolving. To stay ahead, organizations use internal dashboards and partner with external intelligence providers. These tools track sanctions, policy changes, regional tensions, and more. Having access to up-to-date insights allows leadership to act quickly and make informed decisions, even in unpredictable scenarios.
Risk heat maps
These visual tools help boards and leadership teams assess where the organization is most exposed. By mapping geopolitical risks across geographies and categories such as supply chain disruptions, regulatory exposure, or reputational vulnerabilities companies can quickly identify critical hotspots.
When used consistently, heat maps also make it easier to communicate complex risk landscapes to stakeholders, making discussions around mitigation strategies more structured and actionable.
Scenario planning and tabletop exercises
Resilience is built through preparation. Simulating plausible geopolitical events such as a major conflict, abrupt sanctions, or political collapse allows leadership teams to stress-test their strategies, uncover weak points, and improve coordination under pressure. These exercises turn theory into action, ensuring that response plans are not just documented but rehearsed.
Board briefings and war games
To stay ahead of geopolitical shifts, directors need consistent access to insight. Briefings from internal experts or trusted external advisors provide regular updates on relevant political developments, helping boards maintain situational awareness.
War games, or interactive simulations, take this a step further by placing decision-makers in the middle of a hypothetical crisis. These exercises strengthen strategic thinking, test assumptions, and help boards and executives align under pressure.
Cross-functional engagement
Geopolitical risk management works best when it’s not confined to a single department. Legal, compliance, operations, finance, and corporate strategy teams must collaborate to develop a shared view of potential threats and responses. This cross-functional coordination ensures that no risk signal is overlooked and that each part of the organization understands its role in mitigating exposure.
When geopolitical awareness is embedded into daily decision-making, companies are better equipped to adapt quickly and cohesively.
Geopolitical awareness is a competitive advantage in today’s world
Geopolitical awareness is a competitive advantage in today’s world because it helps organizations move from reacting to global events to anticipating them. A mature geopolitical risk strategy doesn’t just reduce exposure, it enables smarter decisions, greater agility, and stronger stakeholder trust.
Companies that invest in foresight and preparedness are better equipped to seize opportunities and thrive in an unpredictable world.
This awareness helps leaders:
- Protect assets and operations by identifying threats early and preparing effective responses.
- Seize opportunities in new or shifting markets before competitors do.
- Strengthen stakeholder trust by acting with integrity and foresight in complex environments.
- Navigate change with confidence, reducing uncertainty in areas like supply chain design, investment strategy, or ESG commitments.
In short, geopolitical awareness supports better strategy, sharper risk management, and long-term resilience, turning uncertainty into an opportunity to lead.
If you’re ready to deepen your geopolitical awareness and bring sharper insights to the boardroom, explore IMD’s online program Geopolitics Series: Navigating America’s New Direction. You’ll gain practical frameworks to assess policy impact, evaluate risk, and lead with confidence no matter what comes next.
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