09/25/2018

Why today’s CEOs need risk managers who can see around corners

Authors: George Stylianides, Global Risk Consulting Leader, PwC UK, Frank Martens, Global Risk Framework and Methodology Leader, PwC Canada and Hélène Katz, Director, Risk and Regulatory, PwC US

Take a look at the responses to two related questions in PwC’s 21st Annual Global CEO Survey, and you’ll find an odd disconnect—and the possible sources of both the optimism and the anxiety permeating C-Suites around the world. Asked whether the global economy will grow in the coming 12 months, 57% of CEOs said they believed that it would, a big jump from prior years. But when CEOs were asked about their own companies’ prospects in the coming 12 months, only 42% said they were very confident of revenue growth.

What explains the gap between CEOs’ outlook for the global economy and for their own organizations? We suggest that it indicates that CEOs have doubts about their organizations’ ability to anticipate and manage the manifold external risks confronting them. Moreover, we think, based on our own encounters with C-level leaders, that they are painfully aware that the markets are far less forgiving today of failures to anticipate risks than they used to be. It used to be that investors would give companies a pass for, say, supply-chain troubles caused by an erupting volcano or earnings targets missed because of international trade disputes. Today, CEOs tell us, investors expect companies to be prepared for whatever circumstance throws their way, and if they’re not, well, it might be time for a new CEO.

As you’d expect, the most pressing external threats vary from region to region. Concerns over infrastructure are a major worry point in Africa and India, while CEOs in Europe and North America are preoccupied with geopolitical uncertainty, over-regulation, and rising cyber threats. And while cyber was amongst the top-five risks in North America and parts of Central Europe, it did not make the even make the top-ten in parts of Eastern Europe or South America, replaced by concerns over populism.[1]

For all their variance, those threats share a few commonalities, two in particular: the threats are external to the organization, and they can’t be managed adequately via controls and checklists alone. In a world where risks are in near-constant flux, yesterday’s static risk management techniques yield few insights to support strategic decision-making. What companies need in today’s unforgiving environment is a dynamic approach to risk, enabled by tools such as analytics and data modeling, and a focus not on reducing risks to zero but on resilience and the capacity to adapt to changing circumstances, whatever form they take.

That means that risk management professionals now need to view risk through a wide-angle lens and consider how the impact of specific threats might ripple through an entire organization. How should a company respond to, say, large-scale population movements driven by changes in climate? Risk managers will need to engage a wide range of functional and business-unit leaders in comprehensive strategic conversations touching on everything from supply chain redundancies to legal ramifications to workplace-safety concerns to distribution impacts. In simpler times, those conversations would have centered on strengthening controls and risk-mitigation measures. Today, though, those discussions have to focus on identifying and ranking each, as well as on developing the flexibility and resiliency necessary to withstand them.

Risk management professionals must also be prepared to contend with risks that were not even recognized as risks a decade ago. Consider the workforce of the future. Has the company prepared for a new normal of talent scarcities? Can risk managers define clearly what impact a prolonged dearth of key skills would have on business strategy? Can they spell out for the C-Suite (and investors) how the company’s recruitment and strategies are changing to keep pace with the workforce?

Not so long ago, such conversations were rare, if not unheard-of, occurrences. Today, with CEOs seeking reasons to temper their anxiety with optimism, they’re par for the course. Welcome to the new normal, where the ability to see around corners isn’t a special gift, it’s table stakes.

[1] PwC, 2018 Global CEO Survey

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