As we start a new year while still grappling with the challenges left behind by the pandemic, organizations are more cognizant of the increasing number of risks in the global market. The range of risks organizations face is broad, intricate, and interconnected, from unpredictable black swan events to more frequent and predictable gray rhino events.
Black swan occurrences, which are highly unpredictable, rare, and uncontrollable, could potentially have a catastrophic impact. Gray rhinos, on the other hand, are common, expected, and often have a large visible impact. It is crucial for boards to concentrate on the latter and integrate them more proactively into their overall risk management strategy.
Beyond the typical risks related to finance, cybersecurity, reputation, regulation, and competition, firms are increasingly pressured to handle risks associated with climate change, sustainability, supply chains, and geopolitics. This has led to a greater emphasis on governance and increased pressure on boards.
The EY Global Board Risk Survey 2023, which polled 500 board directors worldwide from companies earning over $1 billion, revealed that less than a quarter of the respondents are deemed highly resilient.
Highly resilient boards are self-assured and handle unexpected high-impact situations more effectively. They display high effectiveness in aligning risk and business strategy. These boards are neither complacent nor unaware of potential gaps in their preparedness and the evolving risk landscape. By concentrating on certain key areas, boards can support their organizations in prioritizing resilience to more effectively navigate the risk landscape.
PRIORITIZING FUTURE AND SUBSTANTIAL RISKS
Instead of merely bouncing back in recovery, enterprise resilience is more about adapting to risks. This emphasizes the importance of foreseeing substantial and emerging threats, preparing for them, and adjusting accordingly. The board and management need to effectively perceive beyond immediate and apparent threats while allocating ample time to discuss market changes and trends.
Employing technologies such as Artificial Intelligence (AI) and advanced analytics to predict the possibility of black swan and gray rhino events can be beneficial. Implementing quantitative analysis in various situations can improve the board and management’s understanding of the company’s total risk exposure. It can also enhance their comprehension of the viability of the current business strategy and model in the face of emerging risks and whether any adjustments are necessary.
PERSONNEL AND CORPORATE CULTURE
Companies face ongoing challenges, such as talent scarcity, continuous workforce transformation, and managing the diverse needs of a multigenerational workforce. The demand for flexible work arrangements and the growing challenge of aligning culture are becoming increasingly central to the personnel risks that organizations encounter. With rapid technological changes, there is also a need to enable workforces with skills for the future.
The board has the responsibility of supporting management to pinpoint and address the organization’s critical talent needs. They should aim to establish an organization that can adapt to fluctuating expectations regarding culture, skillsets, and diversity, equality, and inclusion. By enhancing their knowledge, adaptability, and supervision, the board can assist management in fostering a people-centric culture. It can also prompt management to cultivate leaders who can embody and sustain that culture.
ADDRESSING CLIMATE CHANGE
The undeniable link between environmental sustainability and corporate resilience means that companies face increased expectations from various stakeholders, including investors. These stakeholders are eager to learn about the company’s environmental, social, and governance (ESG) performance, as it compares to short-term profits and long-term investments in sustainability. Simultaneously, authorities are pushing for transparency in sustainability disclosures, while new standards like the IFRS S1 and IFRS S2 from the International Sustainability Standards Board are reducing ambiguity in sustainability reports.
However, this presents a golden opportunity for companies to showcase their progress in sustainability performance beyond mere compliance. Highly resilient boards are more conscious of significant sustainability issues and feel more at ease discussing them. This usually occurs when responsibility for ESG risks is assigned, either to a leading committee or the entire board.
Boards can also earn the trust of investors by monitoring stringent procedures for gathering, managing, and disclosing reliable data to meet regulatory requirements. If discussions don’t lead to tangible action, the board should question management’s plans and dedication. To effectively fulfill their roles, boards need to enhance their knowledge and expertise in sustainability.
RISKS ASSOCIATED WITH EMERGING TECHNOLOGIES
With advancements in generative AI, the emergence of the metaverse, and escalating cyber threats, the landscape of digital technology continues to evolve at an accelerated pace.
As enterprises increase their investments in digital technology, it is beneficial for boards and management to possess the knowledge required to identify possible technology opportunities and risks. Their responsibility is not to become tech-savvy — but to ensure their organization is balancing the pace of adopting technology with the willingness to take risks and caution. Innovation is necessary and while emerging technologies may be captivating, they alone do not form a robust business plan and must be supported by well-founded business cases — especially in times of economic uncertainty.
To achieve this, the board should collaborate more closely with management, staying informed about significant investments in technology, digital transformation, and cybersecurity. The board needs to encourage management to prioritize the education and skills enhancement of their employees regarding digital matters and acknowledging that the management of digital and technological risks is not solely the responsibility of IT. Boards must gain hands-on experience with new technologies, welcoming innovation with purpose and careful understanding.
At the same time, innovative technology will not be able to progress organizational growth without proper governance. Organizations will need to be forward-thinking and proactive towards innovation, treading the fine line of being agile while also being ethical.
PRIORITIZING RESILIENCE TO FACE RISKS
In response to a complex and interconnected risk landscape, boards need to better support their organizations in prioritizing resilience by focusing on several key areas. They can do so by building resilience, adapting, pivoting and preparing for gray rhino events.
In an increasingly complex world, organizations must be better prepared for long-term challenges. The clarity from top-level management is non-negotiable for boards, as viewing things from a distance can offer a much clearer perspective of the bigger picture.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.
Wilson P. Tan is the country managing partner of SGV & Co.
