Business response to global risks

Today, risks that could previously be managed individually can have a multiplier effect when interconnected. That's why floods in Thailand can stop automotive production lines in the U.S.  The increased interconnectivity, complexity and potential impact of risks is also here to stay. 

Given recent political events around the world, we are fairly certain there will be a lot of focus on geopolitical risks in 2017 and geopolitical volatility is likely to be a key driver of uncertainty over the next few years.

Business importance of managing connectivity

In such a context, caring for business means considering everything that could affect it.  At company level, resilience is required as political risks may adversely affect company’s results and can be existence-threatening.  Companies should anticipate shocks, setbacks and policy reversals in markets undergoing significant change. They may want to enhance their strategic agility and hedge their exposure to at-risk economies. Political risk insurance can be a key part of an overall risk mitigation program.

But geopolitical risks need to be looked at holistically in the context of other global risks. These global risks are connected and businesses need to look at all of those that could have a direct impact on their business. 

It is the interconnected and systemic nature of global risks that creates surprises when their impacts are felt not only locally but also globally. Against this background, it is important for businesses to understand the triggers, trends and scenarios to look out for, and to prepare for the possible consequences of any of those risks.

If business leaders don't look at risk holistically, they won't be prepared for the connected risks of infrastructure failure, cyberattacks, energy price shock and many others that directly impact their ecosystems (i.e. markets, customers, operations, competition intensity). 

We believe there is opportunity to address these risk impacts and more so, to understand how  - especially in the new age of the 4IR - companies can be successful going forward (one should not be obsessed with downside risks and should remain open to potential opportunities).

It's about understanding the risk, understanding the interdependency and connectivity of the risks, and once the impacts are understood, then determining the best holistic response.

What can businesses do?

Managing connectivity is a recipe of success for the future of risk management. A future that is not only based on risk transfer, but also – and more and more - includes greater oversight of the strategic risks and risk management approaches that are integrated to address the risk connectivity, and that are backed up by top-quality data insights and intelligence. This means putting the risk management function at the centre of strategic priorities of corporations.

Companies are encouraged to use tools like bold scenario planning to link global risks to business impact. Robust scenario planning should also include analyses that take into account “large impact but small likelihood” events. At an operational level, companies should build risk scenario impacts into strategic scenario planning.

Responding to global risks need therefore to start at the highest level in companies. (i.e., board level):

• Boards play a pivotal role in defining the company’s risk appetite and in identifying major global risks. 
• Boards also own the risk agenda because they own the strategy. Therefore, risk and strategy are inherently intertwined. 
• To achieve a company’s strategic objectives, the board must decide what risks it is willing to take which drives the company’s agenda. But it doesn’t stop there.  

Global risks exert a huge impact on the company’s success or failure, both at an operational level and often more importantly in terms of its overall business strategy requiring the C-suite level to drive the behavior throughout the organization.

It is also of paramount importance to create a culture of risk awareness and build resilience into the business. Effective companies increase their ability to manage global risks by encouraging diverse and challenging perspectives starting within the boardroom itself. Then searching for ways to embed and incentivize appropriate behaviors throughout the organization, it is the people and the culture of the entire corporate entity that will determine if these risks can be successfully navigated.

When a global risks occurs, it significantly affects companies’ operations. Boards and risk managers must consider the potential impact of various global risks on their physical assets, supply chains, transport, logistic, people, etc. 

Natural catastrophes and adverse weather remains a major contributor to supply chain interruptions. As supply chains have become longer and more complex, so the opportunity for failure at any critical point is greater than ever. Companies tend to lack the detailed information they need to assess supply chain risk. Companies can capitalize on opportunities by building supply chain resilience, which involve business continuity planning, physical loss prevention and insurance to fund the mitigation post event.

As well as taking measures to manage and mitigate short-term disruptions, sustainable businesses should strive to create a framework that will support longer-term enterprise resilience. In a world moving so fast, “not-in-my-term-of-office” is no longer an option and the time to act is now. Building an enterprise resilience framework will help to actively manage both the downside and upside from global risks.

Effective risk management requires companies to take the interdependencies between risks into account, and more than ever demands a truly holistic risk management approach.