Topics:   Business Ethics,Corporate Governance,Corporate Social Responsibility,Cybersecurity,ESG,Risk Management,Strategy

Topics:   Business Ethics,Corporate Governance,Corporate Social Responsibility,Cybersecurity,ESG,Risk Management,Strategy

January 29, 2019

Being Attuned to Forces of Change Is Vital For Corporate Performance

January 29, 2019

We are living through a period of immense upheaval—economic, geopolitical, technological, societal, and environmental—which makes it harder for companies to succeed with the business models that served them well in the past. Indeed, over the past five years, the profits of the top 700 multinational companies have fallen by around 25 percent.

The annual Global Risks Report, prepared by the World Economic Forum with the support of Marsh & McLennan Companies and other partners, and launched in the run up to the annual World Economic Forum meeting in Davos, Switzerland, explores the key forces shaping uncertainty, volatility, and disruption in the world today. Some key takeaways are set out below.

Three Global Risks Stand Out

First, 2019 is unlikely to see any let-up in political friction—neither on the domestic front in many countries, nor on the global stage. Almost all the global risk experts surveyed for the report reckoned that economic tensions among major powers and trade relations will deteriorate this year, and levels of gloom about broader geopolitical discord were only slightly lower. Against a backdrop of rising societal frustration, many democratic governments are incapacitated by deadlock or division, while rising levels of pushback are on the radar of more authoritarian regimes.  

Is this more problematic than twelve months ago? Arguably, confrontational positions are more entrenched and the pressure on government delivery is more acute. Levels of brinkmanship may reach an extraordinary pitch, with the possibility of disastrous missteps. And all this is taking place against a more bearish economic outlook, where a snapping of fragile ties may suddenly drain market confidence.

Second, the evolving cyber threat landscape has become integral to national security agenda. Cyber is the global risk of most concern to US business leaders (a view shared indeed by executives across advanced economies), with the scope for breaches and widespread damage escalating in line with the ever-greater deployment of digital applications across business ecosystems.

The risk is exacerbated by a clear asymmetry between the capabilities of state-affiliated hackers and the security arrangements of most individual companies, which has obliged governments to play a stronger role in supporting corporate endeavors. This, in turn, has escalated to policy level concerns about the use of foreign technology in critical infrastructure, exposures generated through corporate supply chains, and more intrusive foreign state data requirements on company operations abroad.

Third, the long-term toll from extreme weather and climate change could dwarf all others, if we collectively fail to make the rapid and far-reaching transitions required in the next twelve years to prevent global temperature rises from exceeding the 1.5⁰C target. For the global risk experts surveyed for the report, extreme weather and the failure of climate adaptation and mitigation measures dominated risk concerns on a ten-year horizon, and a suite of national climate assessments have spelled out the consequences for individual countries.

Given the uncertainty surrounding multilateral climate agreements, business leaders will need to navigate a dual challenge: responding to increasing pressure from investors, customers, and other constituents (such as state and municipal authorities) to commit to climate-related goals, all while developing contingency plans that anticipate greater climate-related challenges.

Cross-Cutting Consequences

First, the undermining of multilateral arrangements and promotion of nationalist agenda is sapping systemic will and capacity to resolve cross-border challenges. Not only is this spawning new risks and permitting intractable problems to fester—in the near term it is placing companies of all shapes and sizes at the mercy of political wrangling.

Increasingly subject to new tariffs, sanctions, investment constraints, legislative and regulatory requirements, requests for favors, and unwarranted attacks, firms need to be prepared for the prospect of high performance volatility, shock events, and an erosion of competitive positioning.

Second, a tightening nexus of political, economic and technological risks is threatening much-needed investment in infrastructure, a form of investment that is so vital for business continuity, economic progress, and societal prosperity. Analysis suggests that the shortfall of expected investment versus global need will amount to $18 trillion by 2040 (a $4 trillion shortfall in the US alone), requiring a 23 percent increase in current annual investment to close it.

The onslaught from natural catastrophes and the escalation of foreign state-sponsored cyberattacks is threatening the reliability of assets and systems on which we all depend. At the same time, economic protectionism and national security concerns are jeopardizing infrastructure development programs, affecting capital availability, supplier choices, and construction costs. Better public-private cooperation is needed both to enhance the resilience of critical infrastructure and to ensure new projects are attractive for investors.

Third, many of the structural shifts in the global risk landscape have engendered considerable emotional strain for individuals and communities, and the continuous psychological impact should not be underestimated, both in the workplace and society at large. Looking simply through a business operations lens, a failure to grapple with these developments may herald productivity issues, accidents, insider threats, and industrial action among other potential disruptions.

In the rush towards new business models and workflow automation opportunities, firms should reflect hard on how to cultivate the right enabling environment for personnel, in terms of working conditions, career opportunities, and financial security arrangements, even when job security cannot be guaranteed.

Corporate Governance Imperatives

These are challenging times, to say the least, and the board and management teams have no choice but to embrace a world beset by complex uncertainties and strategic emerging threats. Few companies are under the illusion that they can control or inoculate themselves from these macro-level risks, but many have yet to fully appreciate the many ways in which their business might be affected, and to use these insights to arrive at effective and affordable responses.

The 2018 NACD Blue Ribbon Commission report on the governance of disruptive risks clearly articulated the importance of adaptive governance in a world where disruption is continuous. Boards have a vital role in helping set the tone from the top by demanding good intelligence on disruptive risks and establishing the right forum for discussing early warning signals and strategic implications. They should also set expectations of management teams as to how this type of risk thinking should percolate through the entire organization to spur agile, creative solutions that will help business leaders better navigate the challenges of a fast-changing world.

Richard Smith-Bingham leads MMC’s thinking on how companies and governments can best anticipate and negotiate new challenges in the macro-level risk landscape. He has been on the Advisory Board of the World Economic Forum’s Global Risks Report for the past six years.