by Leighton Chenery Issue 112 - April 2016
For those who follow the World Economic Forum in Davos, the forum provides a fascinating insight into the minds of our top business leaders\' and politicians.
Risk was again the topic of the day. From Brexit to China\'s debt issues, from migration to food shortage, oil price to climate change, the discussion and debates around the halls centre around how to solve the important issues that threaten the stability of our economies and world security.
In this article I hope to give you a better understanding of what risk means, how these are interconnected, the impact of Risk on our every days lives, and how as business leaders we have a responsibility to drive change.
Being prepared
Planning for risk is paramount to an organisation\'s long term success. It is critical to understand a company\'s priorities and strategy. 20 years ago, for example, intangible assets represented 20% of the FTSE 100 companies\' balance sheets. Now it\'s at 80% and the focus is much more towards managing risks that directly or indirectly affect brand and reputation.
A recent EY study demonstrates that the top 20% of well risk managed companies perform 3 times better on EBITDA than the bottom 20%. Interestingly its research also revealed that 82% of institutional investors would pay a premium for strong risk managed businesses.
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Driving change
60% of Global spending is through the Private Sector so why should we assume that Government has sole responsibility?
The bottom line is that we all have a duty to drive change.
This year, the Paris Summit on Climate Change was a profound move in the right direction, with business leaders making a critical contribution to the agreement. The key to change, however begins with awareness of our surroundings, and secondly that we have a broader responsibility to society than simply our company\'s bottom line.
What does \'Risk\' mean for us?
Risk is a complex and often misunderstood subject. By its very nature it is uncertain and for most of us we only get to hear about disasters. The perception of risk can be very different depending on whom you talk to. The Challenger Shuttle disaster is a classic example of this when Ground Engineers assessed the risk at 100/1 but Management quantified this at 100,000/ 1.
Risk affects how Businesses plan and invest for the future. Despite its connotations, Risk doesn\'t always mean downside. The actions and investment that busine ss leaders make today can have a tangible impact on future bottom line, and a positive benefit to society.
But even the most successful companies are hard hit when they least expect it. And the outcome of risk events can be seriously detrimental upon a company\'s hard earned reputation, revenue and share price.
Tsunami, floods and terrorism, are the high risks that usually come to mind. However there are many hidden risks that are gradually having major implications in the world we live in. Political and societal shift have a far wider impact than many might appreciate. The growing gap between the wealthiest and poorest is dividing society, and today 20% of the population use 75% of the world\'s resources. As populations grow, there is no getting away from how people feel. They are beginning to vent their frustration and anger and the advent of Social Media / Internet helps to drive revolts, causing riots to fester very quickly. Disenfranchised individuals are being lured into crime and terrorism, and even Governments being overthrown.
At the same time 1.4m people are migrating to cities every day, and there were 50% more displaced individuals last year than during the whole of World War Two. Urbanisation will inevitably lead to overcrowding, homelessness, disease, and once again crime in our towns.
Water shortage, an issue we wouldn\'t particularly identify with at home, is one of the top 3 Global concerns for businesses and Authorities. As a result, Vegas will be history in less than 15 years unless they can find an intelligent and sustainable alternative.
Better living standards and fiscal changes elsewhere are tempting skilled UK workers to migrate overseas. And as technology advances, it is estimated that 5m traditional jobs will be taken away in the UK over the next 30 years. This will leave many companies struggling to find skilled staff.
Emerging technologies bring all sorts of new risks that we\'d never considered before, drones and driverless cars are examples of risks that companies, and risk managers are trying to comprehend.
