Risk in all its forms is inherent in business, – the preventable risks such as unplanned production downtime or internal fraud, strategic risk such as betting the company on an unproven technology or external risks that are largely beyond our control, but which we should always recognize and take into account in our long range planning. It’s the latter kind that the World Economic Forum concentrated on in their recently published ‘Global Risks 2013’ report. With nearly every risk they identify in each of their five categories – economic, environmental, geo-political, technologic and societal – increasing in the likelihood of occurring in the next decade and increasing in its likely impact if it did happen, the report gives a bleak picture of the future. That’s right, everything they see as important seems to be sleepwalking its way into the top right cell of their matrix, – severe income imbalance, the impact of greenhouse gases, major systemic fiscal failure, mismanagement of an ageing population, scarcity of resources and water etc, etc. Despite the tendency for us to wait for our global leaders to set the agenda, the small steps that individual businesses can, should and increasingly do take on issues such as sustainability, welfare and global citizenship can help to recover from this situation.
But to be able to fund such altruistic initiatives companies need to continue to generate wealth and it seems that this riskier environment that we are heading towards is likely to make that increasingly difficult. A recent survey of 547 senior financial professionals at a range of organizations across North America commissioned by the Association of Finance Professionals found that more than half (53%) said they have greater difficulty anticipating risks to their companies’ earnings today than they did before the financial crisis and 86% believe these challenging circumstances are here to stay with external risks such as those highlighted in the WEF report above having more impact on corporate performance than the internal risks such as those originating from treasury, credit and liquidity issues. With NA companies having amassed more than $1 trillion of cash on their balance sheets in recent years and with access to corporate credit much improved, it is perhaps little wonder that senior financial professionals are turning their attention to those issues more directly linked to growing the overall business, starting with the more familiar strategic and preventable operational risks, but working towards the external risks that concern the WEF.
To mitigate these risks, the 2013 AFP Risk Survey results show that companies are embarking on a myriad of strategies ranging from investing in information technology such as SAP Risk Management in order to monitor and manage risks better, diversifying into new markets to spread strategic risk and conducting more reviews of emerging risks with senior management to inculcate a risk aware culture. However given the upheaval of recent times, it is quite surprising that only 13% of respondents had significantly changed the way they forecast critical risk variables over the last five years and some seemed oblivious to the need to do so. Not surprisingly, those respondents who anticipate a more uncertain future are precisely the ones who are re-examining their risk appetites, changing their strategic decision-making processes, introducing a risk-adjusted framework to forecasting and budgeting and enhancing their analytic capabilities at a disproportionately higher rate than those at other organizations. If the rest need a wake-up call, I can recommend any of the summary charts from the WEF reports which I’ve annotated below.