January 23, 2018
January 23, 2018
A positive outlook for the global economy notwithstanding, the operating and investment risk for companies in today’s global environment should not be underestimated. Building resilience against a wide and expanding array of potential shocks will be required for sustainable success.
For corporate directors, this is a time for challenging institutional assumptions — and recognizing not just that new risks are appearing on the horizon but that operational risks may become strategic ones, known risks may become unknown, controllable risks may become uncontrollable, and risks assumed to be acceptable may acquire “fat tails.”
The newly released Global Risks Report, prepared by the World Economic Forum with the support of Marsh & McLennan Companies and other partners, evaluates the major threats facing the world over the next decade and provides a rich context to help organizations chart an aggressive growth strategy.
The risk landscape is shifting.
This year’s survey revealed deep pessimism about the direction of international relations. Ninety-three percent of survey respondents from across the global risk community expect that political and economic confrontations between major powers will increase in 2018. There were high levels of concern about an increase in state-on-state conflicts that may draw in other countries. Western respondents also highlighted growing concern about economic protectionism.
Technological risks are seen as a rising global threat. Business leaders in advanced economies consider large cyber attacks to be the number-one risk for doing business in their respective countries, and respondents in most parts of the world anticipate these attacks will get worse in 2018. Societal risk emanating from the increase in media echo chambers and fake news is also expected to grow.
On a longer-term horizon, environmental risks ranked highest in both likelihood and impact. Extreme weather and failure to adapt to climate change showed the greatest leap in concern since last year’s report, perhaps reflecting the hurricanes, earthquakes, and wildfires suffered during September when the survey was open. However, even before the devastating events of 2017, apprehension in this area was strongly reflected in this survey.
Companies are increasingly vulnerable to shocks and disruption.
Positive growth in recent months shouldn’t blind businesses to potential economic fragilities. The debt-to-equity ratio of the median S&P 1500 company (excluding financials) has almost doubled since 2010 and is now well above pre-financial crisis levels. Asset prices in some sectors are at historically high levels. Global debt has risen to a record $233 trillion, and at 318 percent, the global debt to GDP ratio remains near its all-time high.
Persistent low commodity prices continue to rattle exporter countries and their neighbors, which presents political and societal implications. Structural issues such as income inequality, rising health care costs, and diminishing long-term retirement security also show little sign of being resolved.
Against this backdrop, how will investor and corporate confidence fare in the event of a major geopolitical altercation, an aggravated trade stand-off, or a technological catastrophe—none of which are implausible?
A Business Lens
Corporate lifespans are dramatically shortening. The average time companies spend in the S&P 500 index has already decreased from approximately 60 years in the 1950s to 12 years today. The velocity of change in the current environment, creating both new opportunities and new threats, will likely drive this lifecycle down even further. The pressure to define and execute a strategy with both bold ambition and resilience against major shocks has never been higher.
It’s imperative for board members to ensure their company’s leadership makes every effort to reconcile growth and innovation opportunities with risk and security considerations, while rigorously assessing the value of potential initiatives in a wide range of scenarios. A dual focus on prevention and response—given the increased velocity of new and unpredictable risks—is needed.
As our recent paper on Getting Practical with Emerging Risks notes, clarity on the sorts of intelligence expected and opportunities for the board to discuss weak signals will help achieve a cohesive approach to sense-making and alignment with senior management on the way ahead. Boards that engage with complex uncertainties will be best positioned to help their firms negotiate today’s dynamic risk environment laden with potential shocks and disruption.
Richard Smith-Bingham is a director in Marsh & McLennan Companies’ Global Risk Center and leads MMC’s thinking on the evolving macro-level risk landscape and how companies and governments can best anticipate and negotiate rising threats.