By Tanja Zimmermann
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Many board members see risk management as increasingly important and central. In times of a pandemic, a current shortage of raw materials, which in some cases leads to enormous price increases, or changing customer demands for climate-neutral and sustainable products, this is only understandable. The high connectedness of a global and digital environment increases both business dynamics and uncertainty of the future and the risks for corporations. As a result, many corporate boards view effective risk management as more important than ever and are reviewing their current one.
Ernst & Young conducted a study on risk and published it under the title "EY Global Board Risk Survey 2021". Specifically, more than 80 percent of respondents see that risks and similar fundamental changes will increase. However, it is noticeable that there is a discrepancy between the currently implemented risk management and the assessed importance. The need is recognized, but transformation to better risk management lags. What is currently important in risk management?
The long-term orientation of risk management is becoming more important
The time periods considered for efficient risk management are becoming more crucial. It is noticeable that boards are starting to rethink. For example, EY's study finds that risks are now being considered for longer periods of time, over at least five years. For many, efficient risk management with a medium- and long-term focus has become essential - risk management gets a strategic notion.
The survey polled 500 board members worldwide. It turns out that they assess risk management in their companies as being too much anchored in the here and now and too little focused on the future. In fact, it only safeguards the status quo. It does not consider the fact that new risks may arise over time. This is because many risks and developments are judged to be of little significance in the current period. However, their significance and extent may increase in the long term and gain strategic importance.
The complexity, dynamics and effects on other sectors are increasing
The complexity of risks and thus their effects on other sectors are partly neglected. This applies, for example, to climate change. Companies in the energy and natural resources sectors have had to deal with changes brought about by climate change for some time. Companies in other sectors are mostly still unaware of the extent and significance of the impact it may have. For example, while the survey results show that corporate boards expect climate change to have a major impact, they assign it only a medium priority in their own company. Yet the shortage of chips or raw materials, such as wood or steel, shows just how much they can affect other industries. Modern risk management should therefore be embedded at board level and take into account all activities at business unit level. Otherwise, it is not efficient, as real threats to the business may be overlooked.
New and external risks require early analysis
Complexity and dynamics have increased. Therefore, risk management has to become more adaptive. Traditional risks, which can arise from changes in legislation or a change in credit costs, are feared by few companies. New risks, on the other hand, which can also arise from new technologies, can change entire business models and industries. Individual companies may even be forced out of the market. They thus bear a high disruptive risk. But new technologies can themselves bring new dangers. As a result of the digital transformation, companies are exposed to and confronted with new risks in the form of cyberattacks. Far-reaching changes can arise in other ways as well. From a geopolitical perspective, commodities are becoming increasingly important. Tariffs, protectionism, and trade barriers may be a possible outcome. This requires not only a sectoral view, but also a regional one. For example, EY's study shows that executives from the Asia-Pacific region view risks as more disruptive and far-reaching. This may be because they are closer to the circumstances, and they therefore see the shifts as more serious. The signs of serious change usually emerge early. They just need to be recognized and interpreted accordingly.
An early analysis at all corporate levels, considering different sectoral and regional perspectives, can therefore contribute to a comprehensive analysis.
