by Carl Hess*
Adapting in an uncertain and varying environment is fundamental to business success.
Today’s challenges are fuelled by the frequency and complexity of threats across risk categories, from geopolitics to economic volatility, from climate change to population health, and from talent to supply chain.
The time to act is now for business leaders to confront these challenges and create opportunities by engaging people and finding a sense of purpose.
At WTW, we see three critical imperatives for businesses to thrive in the changing landscape:
1. Connect and manage the full range of risks
The contemporary environment illustrates the impact of multiple low-frequency, high-impact risks arising nearly simultaneously: a global pandemic, geopolitical conflict, financial shocks, a series of “hundred year” weather events, social disruption and significant labor shortages. While the frequency and concurrence of these events may appear unlikely, WTW’s predictive analysis across 10 risk categories calculates a 63% probability of one or more hundred-year events in any given decade, and a 26% chance that multiple such events will occur in the same decade. The likelihood is even higher when events are interdependent.
The best way for businesses to prepare for such interconnected risks – as well as others, such as terrorism or cyber threats – is by considering them holistically, which achieves better outcomes than managing them independently. Using data, analytics and statistical models to consider connected vulnerabilities enables business leaders to foresee events, determine how to address them, and reduce potential downward performance spirals.
For instance, investment risk has become more systemic, difficult to diversify or hedge, and highly uncertain. Business leaders can no longer rely on basic analysis of historical return patterns to make effective decisions and create long-term value. They need an understanding of how new risks from ecology, technology and demographic shifts can trigger changes to value and enable them to anticipate threats, prepare for the unexpected and act decisively.
Here are three areas in which business leaders can seize opportunities by better managing risks:
Mitigate risks that are not well covered (or well known): Many severe risks are under-insured and not well understood, including geopolitical, cyber, supply chain and reputational risks, leaving organizations exposed to potentially irreversible damage to crucial assets and systems. If leaders better understand and manage these risks, they will be better able to generate sustainable returns over the long term.
Optimally funding risk mitigation efforts: Managing complex risk portfolios requires investments and capital sourcing that provide funds that align with an organization’s obligations. Capital needs to be available to mitigate unforeseen yet financially damaging risks. Organizations can mitigate systemic portfolio risks by adopting sometimes under-used alternative risk and capital solutions that diversify capital among various sources and risk categories.
Address work risk: As work practices transform around the world, so do their associated risks.
For example, remote work may increase cyber breaches, and create performance issues and employee retention risks. No matter how organizations adopt new ways of working, managing the risks associated with employee performance and preferences, cost increases and skill shortages is critical.
2. Act on ESG risks and on sustainability
As investors place greater focus on intrinsic value and long-term economic health through stakeholder capitalism, expectations regarding environmental, social and governance (ESG) and sustainability commitments rise.
ESG goals must be linked directly to managing long-term risks. Many organizations have taken initial steps to understand and quantify their environmental impact. Few have reflected the full range of climate risks in their strategies. Examples include physical and liability risks to people and property arising from extreme weather events as well as risks during the transition to a low-carbon economy. Leaders must understand and mitigate the impact of these increasing risks to people, production, distribution, financing, capital allocation and overall enterprise value.
Organizations also create value by helping employees to flourish, creating cultures and programs that support skill development and wellbeing. They recognize that people are essential to sustainability and risk management efforts. They ensure that diversity, equity and inclusion (DEI) policies result in ample representation of under-represented groups in key roles and management levels, and that capital allocation advances equitable long-term opportunities for all stakeholders.
Finally, the role of governance has expanded beyond avoiding failure, fraud or scandal. Key governance components include appropriate decision-making frameworks and processes for boards and senior management, as well as enterprise-level measurement, analytics, and protocols that drive risk and threat assessment, regulatory compliance, accountability and sustainable performance.
3. Build organizational resilience
Organizational resilience is the ability to bounce back from adverse events, learn the lessons and emerge better positioned against similar occurrences. Building resilience is best addressed on three fronts:
Financial: Building greater flexibility into how capital is allocated improves the diversity and sources of return under uncertain conditions and helps support agility in light of the unforeseen. Experimenting and quickly learning from risk mitigation and investment opportunities helps enterprises become more adaptable to unpredictable events and achieve more sustainable returns.
Operational: Developing new ways to serve customers and protect employees during unforeseen events requires emergency response planning, crisis management, workforce flexibility and technologies that ensure that business can continue under adverse circumstances.
Human: Businesses with leaders who care about employees’ individual physical, emotional, financial and social wellbeing needs and create a common, enterprise-wide sense of purpose thrive under difficult conditions.
Analytics vital to managing and mitigating risks
Data and analytics are critical enablers as organizations seek to effectively manage risks and increase employee and businesses resilience.
Organizations currently have a vast array of data in areas including insurance claims and losses; employee pay, benefit and skills; and climate, cyber and capital risks.
Leaders can use artificial intelligence and analytics to generate actionable insights and perspectives. By using predictive modelling, they prioritize and better understand their needs and optimally deploy capital.
While recent events have challenged many business leaders, their actions have shown that managing through uncertainty is possible. By focusing on the three imperatives we’ve outlined, organizations can be stronger and better prepared for the future.
*Chief Executive Officer, Willis Towers Watson
**first published in: www.weforum.org