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RISK MANAGEMENT IN THE AGE OF TERRORISM
Peter Geib
Center of Business
Minnesota State University-Moorehead
Moorehead, MN 56553
Tel.: (218) 477-4657
Fax: (218) 477-2238
E-Mail: [email protected]
and
Lucie Pfaff
Professor Emerita
Department of Business/Economics
College of Mount Saint Vincent
Riverdale, NY 10471
Tel.: (718) 405-3375
Fax: (718) 405-3374
E-Mail: [email protected]
ABSTRACT
The events of 9/11/2001 have had an important impact on business activities. An examination of
measures taken by enterprises to deal with the risk of terrorism has added another dimension to the
cost of doing business. Described here are some of the actions taken by corporations in this changed
environment, especially in the international arena. In addition to a general discussion of problems, the
paper focuses on several Asian regions and country reactions, but also on the added risks corporations
face when operating in those regions and on measures needed to manage the new risks.
INTRODUCTION
For multinationals operating in many countries, country analysis in regard to risk and cost was always
the first step to determine the most suitable location abroad. The assessment would include political
risks such as expropriation, regulations, foreign investment restrictions, even corruption. The
economic risks would center on foreign exchange risk, financial system, general economic conditions,
infrastructure, labor market, to mention some. Other factors would be geography, climate, culture,
among others. However, the events of September 11, 2001 and the subsequent conflicts have added
another dimension to the country risk analysis (Conklin, 2002). Legislation passed in the U.S. in
response to 9/11 has added a costly burden on business. Financial institutions, e.g., have to comply
with “anti-terrorist regulations” at their own expense (Weidenbaum, 2003). Under those regulations
all financial intermediaries have to determine that account holders do not belong to terrorist groups,
cease transactions with “shell banks,” have to have more information about foreign banks they do
business with, and for hedge funds that they do not accept money from anonymous sources. All
businesses have to establish policies and procedures to identify risk and possibly terrorist activities.
As a result, financial intermediaries have to employ special compliance officers, train employees to
detect improper transactions, and also commission independent audits (Weidenbaum, 2003).
The example of financial institutions describes the impact on just one industry. Many of the
measures apply to all private enterprises. For corporations there is increased security personnel,
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screening of customers, visitors, and their vehicles. In the hiring process background checks are more
involved, and mail and deliveries are much more carefully checked. All these added security features
are an additional expense for the corporation. The increased overhead raises the cost of production.
Included in such new costs are, e.g., security services, personnel investigations, protective equipment,
higher insurance premiums, even telecommunications equipment to replace travel needs.
What has become more complicated at home, translates into additional difficulties for
international operations. Corporations have daily interactions with overseas subsidiaries, customers,
partners, alliances. In the period immediately following the events of 9/11, daily interactions with
overseas and all international movements became more difficult. For instance, new anti-terrorist
measures for checking cargo going to the United States delayed departure in foreign ports by as much
as 8 to 10 days or more. Not only was there initially a reluctance to travel by air, but fewer
Americans were willing to work overseas, especially in countries where terrorism is a major threat. It
also slowed intended investment due to higher perceived risks, as well as higher costs of exports and
imports incurred in the delays from heightened border security. Although some of the initial
reactions, such as corporations restricting international travel and canceling outsourcing plans, have
normalized, it has been estimated that overall workplace security costs in the year following the 9/11
attack probably increased by 15 percent. The estimate for additional costs to companies responding
to the continuing threats is put at $150 billion a year, with higher costs of logistics and insurance
making up a large portion of the increase (Weidenbaum, 2003). The effect of all this is that terrorism
has imposed a new tax on international business. The costs of security will decrease the returns on
trade and investment. The security response is only one aspect affecting business. On a long term
basis measures have to be taken to counter the threats and minimize exposure. Among actions taken
are decentralizing, develop back-up systems, change travel patterns, to name just a few.
In the following pages we will examine not only actions taken by corporations, but also look
at some U.S.-Asia relations as they may impact on the political risk aspect of doing business abroad.
Among the countries discussed in regard to U.S.-Asia relations are India, China, the Koreas, and
Singapore.
METHODOLOGY
This research is based on traditional documents and a continual series of structured interviews
conducted in Asia and Southeast Asia over the last decade including the most recent series of
interviews over the last decade including the most recent series of interviews carried out in China and
India during the summer of 2005. Data, including interviews were also collected in Washington,
D.C. at the Department of Commerce in the summer of 2005. The researcher conducted interviews in
Indonesia and Singapore, where he lived for eighteen months on sabbatical in 1999-2000. The
structured interviews are not meant to be survey research. They are focused on what, in the judgment
of the researcher, are key influences affecting decision-makers in their particular private or public
roles. Because of the politically sensitive situation in the countries discussed, those interviewed
requested anonymity and, therefore, all information is kept confidential.
NEW COMPLEXITIES AND THE INTERNATIONAL CONTEXT
The international crosscurrents created in the wake of 9/11 and the emergence of global terrorism
have brought profound strategic realignments. These strategic changes translate into additional
difficulties for international operations but also enhance
opportunities. The changing political crosscurrents have to be taken into consideration for all
corporations operating in the affected countries and become part of strategic planning in regard to
political risk. It is helpful to assess country reactions to the changed situation. As mentioned above,
the countries discussed here in regard to evolving relations with the U.S. and actions taken on
terrorism are India, China, Korea, and Singapore.
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India
In great part as a result of September 11, 2001, the U.S. has signed a new ten year defense pact with
India and has also opened the door to India’s greater legitimacy as a nuclear power. Part of this effort
is driven by the U.S. goal to counter China’s rise. As the editors of The Economic Times of India
wrote,… “There are a number of critical areas, from fighting terrorism to developing energy
strategies, where India and the U.S. can and need to work together. For that, both countries will not
only have to discard past baggage but also recognize that close cooperation in one area does not
preclude disagreement in others.” (July 18, 2005, p. 18).
But the issue of global terrorism clearly affects Indo-U.S. relations in another way as a
consequence of regional politics. India remains cautious about allying itself with the U.S. at the
expense of its other strategic relationships. For example, India wants a good relationship with China.
Also, it is skeptical of the U.S. as an arms provider given U.S. cooperation with Pakistan in the war
on terrorism (on-site interviews, India, 2005).
The complexity of the international context is indeed further highlighted by the case of India.
At a major conference sponsored by the Confederation of Indian Industry and the Asia Society,
participants expressed concern that the U.S. has been too unilateral in its focus on terrorism to the
neglect of regional issues. The U.S. has not consulted comprehensively with Asian nations and has
suppressed civil society movements in a negative way. On a more positive note, some participants
suggested that the U.S. has the terrorists on the run (The Williamsburg Conference, New Delhi, April
4-6, 2004, Asia Society and Confederation of Indian Industry, published by Asia Society, New York
City, 2004).
China, Terrorism and the Koreas
An additional factor of the complex context is nuclear proliferation and North Korea. North Korea’s
nuclear program particularly as it relates to proliferation is a significant component of the issue of
global terrorism. The U.S. needs China on the Korean situation. The issue has brought China and the
U.S. closer. This particular problem is perceived by most in the international community as
multilateral, calling for a diplomatic solution (The Williamsburg Conference, 2004).
One interviewee reports that the Chinese leadership insists on the vehicle of six-party talks.
One of the complicating factors is the mystery of U.S. foreign policy. It may well be that the case of
North Korea is not a priority for the administration. At the same time, China’s growing economic and
political power allows it to change the rules of the game (Interview, The Economic Group, Hong
Kong, July 2005). The concern of the Asian nations at the 2004 New Delhi Williamsburg Conference
for more regional participation focused on global terrorism may well emerge as a natural consequence
of events and regional interests.
South Korea has proposed a three-stage approach as a possible way out of the stalemate. It
would begin with a commitment by North Korea to dismantle its nuclear facilities. Other countries,
including the U.S., would guarantee to provide security. This would be followed by the freezing of
the nuclear program, verified by monitors, and the provision of aid (The Economist, February 28,
2004).
Against this turbulent mix, some South Korean corporations are trying to establish operations
in North Korea. The Hyundai conglomerate was actually involved in payments to Hanoi to arrange a
meeting between North and South Korean heads of state. The attempt ended in a scandal (Moon,
2003). However, South Korean managers move regularly across borders to manage organizations
with North Korean workers. Overall, cross-border cooperation is increasing (Economist Intelligence
Unit, July 4, 2005, p. 1).
Singapore
The Singapore case represents an important example of how a country reacts to globalized terrorism.
The city-state has taken new initiatives to enhance a positive globalization and protect itself from
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terrorism. Singapore consists of one main island and fifty-four small ones at the southern tip of the
Malay Peninsula. It is essentially a Sinic society and well educated. Singaporeans live in a Muslim
neighborhood. Indonesia has the largest Muslim population in the world with some active terrorist
cells (The Economist, June 12, 2004). Singapore has made several successful raids on terrorist cells
actively operating on the island nation and has recently negotiated a defense alliance with the U.S.
As a small island, Singapore needed someone to pay the bills. From the beginning, Lee Kuan
Yew, the city’s patriarch, set out to attract foreign companies looking for a base for manufacturing
and oil-refining operations. In addition to the free trade, the historical core of Singapore’s policy has
been fiscal conservatism, attraction of foreign investment, tight money policy, a clean bureaucracy,
alliances, single-party rule and law and order (on-site interviews). Perhaps nothing explains modern
economy and Singapore’s success as well as a policy of “law and order”. From the beginning in
1965, Singapore has understood that a small country, its influence and protection would lie within a
global regime of international law and rights for all nations whether large or small (on-site interviews,
Singapore, 1999-2000). Singapore’s political elite has understood that in order to attract investments,
particularly from the West, they would need to institutionalize transparency, predictability, and
certainty.
Singapore’s response to global terrorism has been to expand its intensive network of alliances
particularly a defense pact with the U.S. and expanded anti-terror efforts with the U.S. The
contemporary expansion of Singapore’s alliance structure actually began with a response to the 1997
Asian financial crisis, the first major problem of this era of globalization. It is important to note that
Singapore fell into recession because a quarter of its two-way trade was with the nations hardest hit
by the crisis: Indonesia, Malaysia, the Philippines, and Thailand. In early 2001, Singaporean officials
began negotiating trade deals with Australia, the U.S., New Zealand, and are now looking to Mexico,
Chili, and Japan as well as new initiatives toward Hungary, Poland, and the Czech Republic.
THE IMPACT OF TERRORISM ON OPERATIONS AND STRATEGIES
Internal Re-engineering of Organizational Culture
For most companies to address the changes in the business environment due to terrorism mean
reshaping the corporate culture. Internal planning has to address the reorganization through education
and awareness-building. The focus has to be on information-gathering and an attitude of awareness at
every level of the organizational architecture and process. As an example, company sales
representatives must now focus not only on their functional area in different cultures, they must add
an attitude of alertness and pro-active information-gathering regarding business activities impacted by
terrorist threats.
Internal re-engineering has to address all levels of organizational interdependence when
dealing with terrorism. Information must be continually and rapidly shared with all divisions of the
organization. Therefore, an attitude of acute awareness must permeate every level of company life.
Besides that, an effective feedback system must be developed. Feedback may involve information
from the external environment, its effective decoding and dissemination throughout the organization.
This involves management information systems as well as training and education. It is important that
management examines attitudes and behavior in the workforce which might obstruct awareness, or
the collection, and dissemination of information. This is an absolute must in order to change the
nature of the organization.
Re-engineering efforts have to have absolute support from the “top” of the organization.
Because reorganization is costly, the support from the “top” is critical for the reallocation of internal
assets and expertise. Clearly, the nature of operations management will be determined in great part
by business sector characteristics. For example, the Airline industry has incurred heavy expenses for
added security and retraining. The financial sector has its own additional costs for security measures,
education and training. Shipping and supply chains face problems specific to this sector of industry.
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At a closer look, terrorism affects every level of business in one way or another and imposes
additional costs of operation.
Operations Management: Strategies for Partnering and Alliances
When operating in the international environment, partnering and alliances often become the strategy
of choice. In countries like India and China, partnering is essential to understand culture, law, and
markets, but it may also provide the defense against terrorist activities, as partnering may help to
understand locally developed terrorist cells.
Operating in China may require structured alliances. Although the general history of joint
ventures in China have a dismal record, often it is the only way permitted by government to operate in
China. What U.S. managers found was that the highly structured, legalistic arrangements sought
were not achievable. Less formal co-development configurations in marketing and distribution
served them better (on-site interviews, China, 2000-2005). However, many companies buying into
Chinese corporations found that the Chinese just wanted knowhow, designs, technology and that they
were squeezed on return on investment. Some eventually walked away (The Economist, August, 7,
2004).
In cases of transition economies like China and India, western managers may have to
collaborate with firms that are undergoing privatization. The ensuing ambiguities can be
extraordinarily complicated as one must directly deal with governments as well as partially stateowned firms in a rapidly changing environment. This is particularly true in the cases of China and
India (on-site interviews, China and India, 2005). Not only is the process of communication and
decision-making regarding terrorism more complicated and the alliances may get caught in the
crosscurrent of domestic politics, the risk of protecting proprietary information is added to the mix.
In China and India, the protection of intellectual capital continues to be hugely significant in the light
of continuing massive piracy of intellectual property (on-site interviews, China and India, 2005). In
terms of defending against terrorism, firms need to transfer in some cases their most significant
technology creating major alliances stress. The only solution seems to be careful planning, design,
and term-building focus and communication (on-site interviews, China and India, 2005).
Decentralization as Strategy
In the age of terrorism it makes perfect sense to conduct operations management on a decentralized
basis. Decentralizing operations is occurring not only abroad, but also domestically. Concentration
of resources in one highly visible and vulnerable headquarters location can be an invitation for
terrorists to seriously disrupt operations of a corporation. It makes sense to separate divisions and
create back-up sites in the U.S. Overseas, some U.S. corporations are shifting activities deemed to be
unstable to more stable, but more expensive, areas of operation. Other companies have decided,
rather than outsourcing abroad, to use U.S. based businesses for their outsourcing needs for reasons of
business continuity and ease of dealing with local providers (Gallagher, 2002). With the help of
modern technology, many airlines have coordinated their call centers around part-time housewives
working from home in states like Utah and others in the Midwest. Several catalog companies have
gone the route of the airlines and found that it is just as cost-effective and less problematic than offshore sites. In order to hold on to existing accounts, some technology companies with engineering
centers in other parts of the world, taking advantage of labor savings, assure business customers that
they are U.S.-based companies, and all the assets and intellectual properties are in repositories and
secure in the United States (Witkowski, 2001).
The Human Resource Equation
The human resource issue is central to fighting terrorism. Clearly training and education are an
important aspect of meeting this challenge. Since global terrorism is multi-dimensional, so must be
the training response. Training is particularly important for a strategy of “localization.” The type of
training and education will be sector determined. For human resource management, the hiring
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process is becoming more involved with effective screening, questioning, background evaluation. In
many industries special compliance officers and auditors have to be hired.
In the financial sector terrorism has become a costly burden. Special training must focus on
the verification of all financial transactions. Often this requires training employees to detect improper
transactions. Shell organizations have multiplied, and as mentioned above, banks have to verify all
sources of assets and the “legitimacy” of other banks they do business with (Weidenbaum, 2003).
Under anti-terrorist regulations, training must be required regarding foreign banks, “shell banks” and
other international groups.
In the legal and political arenas training must be provided regarding the changing nature of
legal frameworks. A multitude of new legal requirements, such as special audits, financial
verification, or in-depth hiring evaluations, raise costs across the board. Moreover, governments of
international organizations might require political cooperation for anti-terrorist strategic purposes that
impose whole new subsets of legal requirements. Risk is dramatically increased in transition
economies where the laws are drastically changing as in India, or where legal systems in the modern
sense have hardly existed at all and must be created (on-site interviews, Asia, 2004-2005).
When speaking of decentralization, the discussion referred to capital assets, such as
headquarter buildings, and protection of technology, such as software, but protection of human
resources is another dimension in the era of global terrorism. Today CEOs abroad face dangers of
attacks and kidnapping. In the past, soldiers and governments were exposed to such attacks. Today
the heads of major corporations often are becoming the targets (Cherkasky, 2002). The result is that
special security for executives has become necessary. The protection takes the form of personal
guards, extra security checks, bullet-proof automobiles, etc. Many senior executives of widely known
companies are changing the patterns of their day-to-day activities so that their movements cannot be
followed as easily (Weidenbaum, 2003).
The safety concerns are not only for CEOs, but for all personnel working on foreign sites, as
well as for their families. Some workers are asking employers to send their families home or move
them to a more secure location (Hanrahan & Bentivoglio, 2002). It has also become more difficult to
persuade workers to take overseas assignments. If a company is in a potentially unsafe work location,
the company definitely has to reevaluate all security arrangements and policies.
CONCLUSION
In the aftermath of the events of 9/11/2001, the business environment has been affected in all aspects
by global terrorism. On the political side, relations between the U.S. and other countries has changed.
Some of these changes impact on multinationals and the conditions in which they operate abroad.
More critical are legal ramifications, fear of attack, and overall security aspects affecting operations
abroad. Organizations have to adjust their internal corporate culture to respond to the changed
conditions. Education and training are necessary to prepare and alert employees, to raise their
awareness, and train them to collect, share and disseminate vital information throughout the
corporation. In many industries heightened security measures have become part of daily operations.
Such factors make operations more difficult, may disrupt the time frame of schedules, lead to the
need for additional personnel, etc. Such measures not only complicate day-to-day operations, but
increase costs of doing business considerably.
The political and legal environment in some of the Asian regions may work for or against the
decision to invest and operate in that region. The case of Singapore demonstrates how a country
successfully implements policies to deal with global issues. Policies implemented by this government
reassure and assist multinationals in regard to their investments and operations. This kind of
reassurance is not present in all Asian locals. Corporations have to weigh the risk vis-à-vis labor
savings and desired market presence. In Indonesia, e.g., the risk is often perceived as too great and
investors decide against operations in that country.
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The ongoing activities of international terrorist groups will continue. The concerns about
future terrorist attacks will impact corporate operations and are prompting companies to make disaster
planning part of their future strategy. Many businesses are developing their own contingency plans to
deal with future terrorist attacks, particularly if they are operating in a number of different countries.
Long term, corporations need a comprehensive crisis strategy which will include not only security
systems, but also corporate structure modifications.
REFERENCES
Primary Sources: (P. Geib)
160 on-site interviews conducted in Shanghai, New Delhi, Beijing, Hong Kong, and Singapore, 19982005.
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Conklin, D.W. (2002, January/February). Analyzing and Managing Country Risk.
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Dietderich, A. (2002, April 15). Offshore shores up IT. Crain’s Detroit Business.
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