Companies must adopt fuller view of risk, understand the expected can combine to produce surprises: Marsh

Boards and executive teams must develop a much stronger context for risks that may seem to be safely over the horizon if they are to avoid being blindsided by unwelcome surprises, notes a new paper from Marsh & McLennan Companies’ (MMC) Global Risk Center.

By focusing on what is readily predictable and controllable, many companies “can blind themselves to risks that might individually not be unexpected, but which might combine to produce highly unwelcome surprises,” Emerging Risks Quandary: Anticipating Threats Hidden in Plain Sight reports.

“To properly consider the key emerging levers of value destruction, many corporate risk management frameworks need to be more forward-looking and ambitious,” states the paper, which offers insights from Oliver Wyman, Marsh and Guy Carpenter. That demands clearly four hurdles: informational, analytical, behavioural and organizational. [click on image below to enlarge]

The paper found that many companies are struggling to articulate the precise relevance of global and emerging risks to their business and are poorly organized to make timely decisions, notes an email update Monday from GCCapitalIdeas.com, part of MMC. “Increasing global economic integration, technological advances and geopolitical friction are profoundly complicating the risk landscape, creating exposures and vulnerabilities that have the potential to generate more than mere ‘volatility’ in corporate earnings,” the paper notes.

The risks of concern in the paper largely stem from the intersection of global megatrends such as fundamental demographic shifts, climate change, technology innovation and movements in the balance of global economic and political power. It explores what impedes corporate efforts, as well as how companies can look beyond predictable and controllable risks to complex uncertainties that have the potential to generate volatility in corporate earnings.

Although sharper analytics and better-crafted control frameworks in recent years have enabled “companies to get a stronger grip on everyday risks that drive performance variance and operational disruption,” the paper notes, “these frameworks fall short when it comes to messier, more complex challenges and sudden crises, where leadership discussions should focus on strategic resilience and positioning rather than risk reduction and risk investment optimization.”

Companies do not necessarily struggle to identify the key topics, the paper points out. “Instead, their problems lie in understanding the consequences of potential risk pathways for planning and operating assumptions,” it adds.

The perennial challenge of anticipating second-and third-order consequences of easily identified predicaments means emerging risks are often hidden in plain sight. “To yield valuable insights, attempts to understand the risk landscape should be creative and open-minded. Filtering sense from noise, formulating scenarios, and thinking through implications requires a keen curiosity,” it notes.

“Becoming more attuned to emerging risks shares as many characteristics with innovation thinking and strategy formulation as it does with standard enterprise risk management,” the paper notes.

For example, current and future threats exist for industries ranging from banking to insurance, healthcare, consumer goods/services and energy. [click on image below to enlarge]

Some of the paper’s key takeaways include the following:

• successful programs for emerging risks overcome well-known challenge – patchy data on threats, a lack of clarity about business significance, limited senior-level engagement, and weak integration within business decisions;
• a watch list of key threats should draw from diverse sources, which may include corporate risk register, external publications, expert interviews or workshops, and bespoke data mining or analyses of social media;
• scenarios are a helpful way of giving shape to emerging risks and positing plausible alternative futures – without any claim to prediction (these should be carefully designed according to the purpose they are intended to serve); and
• a framework for monitoring designated emerging risks is vital for providing early warning on changing threat levels (undertaken in a structured way, this can feed into senior management and board reporting on the possible future risk profile of the firm).

“Thoughtful consideration of global and emerging risks can build corporate resilience to the unexpected, inform strategy choices and stimulate innovate,” the paper states. A more energetic approach to exploring “future threats and uncertainties is vital for long-term sustainability.”