2008-2009 Risk trends
The crisis reshapes the criticality of risks and reminds us of the necessity of risk management. The parameters have quickly and dramatically changed, as shown by the listing of the 10 major risks for 2009 from the joint survey by Ernst & Young and Oxford Analytica, "The 2009 Ernst & Young business risk report."
While a world economic crisis was brewing, risk management in Switzerland became a new requirement under the Code of Obligations (663b). This was no coincidence. The complexity of the changes affecting companies calls for a centralized approach to the risks facing companies at global level.
In view of the current financial difficulties, the need for a risk management system is clear: without a consolidated overview of the risks facing companies and the implementation of reduction measures, crisis anticipation is impossible, a situation which poses a direct threat to the survival of a company. Traditional insurance-based risk management is inadequate in the light of the current perils, some of which, by their nature and the scale of losses they represent, go beyond the scope of the insurance sector.
Risk management must be regarded as a tool which makes it possible to achieve the Company’s targets, a strategic overview guaranteeing the Company’s continuity. The aim of risk management is to improve visibility and hence reduce the burden of uncertainty and volatility weighing on company activities and assets. Companies who have integrated this approach into their practices will be able to capitalize on opportunities and strengthen their competitive advantage.
The radical and apparently unpredictable nature of the changes under way reinforces this viewpoint. Worldwide socio-economic upheaval has accelerated the pace of change in terms of risk criticality: the key risks in 2009 are not those of 2008. In a fiercely competitive environment, companies have to be able to anticipate and adapt rapidly to change.
A survey conducted jointly by Ernst & Young (EY below) and Oxford Analytica (OA below) of a hundred State-owned and private companies in different sectors[1] reveals significant changes in major risks[2] affecting companies in 2008 and 2009 and underlines the importance of frequent corporate risk reassessment.
1. Credit crunch
The credit crunch has become the no. 1 concern of companies in 2009 in all the sectors polled. No. 2 in 2008, this risk replaces regulatory compliance. No. 2 in 2008.
2. Regulation and compliance
Compliance remains a prime concern, especially for companies in sectors such as life sciences, telecommunications, oil, gas and electricity.
In addition, uncertainty surrounding new regulations introduced following the worldwide financial crisis has exacerbated the criticality of the compliance risk in asset management, banking and insurance. No. 1 in 2008.
3. Deepening recession
This risk appears for the first time in the EY and OA listing. Their finding is that the combination of the financial crisis, fall in property values and the financial markets and reduction in the availability of credit has generated a significant risk level, likely to impact more acutely on companies unable to balance out their losses among the different world markets.
4. Radical Greening
The criticality of environmental issues is growing, impacting spectacularly on sectors such as the motor industry, property (construction/renovation), energy (oil, gas, electricity) and public services. According to EY and OA, the management of these issues will constitute a major competitive challenge in the future. In addition, changes in legislation in this area are likely to have a significant financial impact on companies whose current practices are found to be non-compliant in the future. No. 9 in 2008.
5. Non-traditional entrants
This category includes economic players diversifying their activities and new players from emerging economies. The adverse economic situation, coupled with the strengthening of the emerging economies, has exacerbated this risk to established companies. By the same token, existing players are being driven to innovate in order to retain their competitive advantage. No.16 in 2008.
6. Cost cutting
In a world economic downturn, cost control and reduction are more than ever crucial to the survival not only of companies, but entire sectors, such as the motor, media and consumer products industries. All players, from the producer to the consumer, through the supplier, are affected. No. 8 in 2008.
7. Managing talent
While skills management has been a core issue for a number of years, the growing complexity of the world economic environment has made this risk less manageable. Firstly, the growth of the emerging economies is creating a significant knock-on effect for local resources working abroad; secondly, the intensification of the debate on wage scales and structures poses a challenge to aggressive wage policies. Finally, the increase in risks attaching to reputation and managerial responsibility is likely to have a negative impact on the recruitment of well-qualified board members. No. 11 in 2008.
8. Executing alliances and transactions
The number of M&A (mergers and acquisitions) has fallen sharply due to the tightening of conditions attaching to credit. However, M&A are still a key component in the strategy of large companies. But such operations carry a risk due to the complexity and criticality of company valuation and the dangers of merging different corporate cultures. In addition, the crisis has lead to sudden dramatic “rescue” mergers, for which the due diligence (validation of strengths and weaknesses – drafting of a liability guarantee clause) has been carried out only after the event. No. 7 in 2008.
9. Business model redundancy
The business models employed for the last several decades are today seriously challenged by new models. In this environment, a Company’s capacity to adapt is a skill likely to guarantee its survival. A new risk for 2009.
10. Reputation risk
Ranked no. 22 in the 2008 survey, reputational risk has jumped to 10th place in 2009. The crisis, in particular the credit crunch, has made the financial health of companies a core reputational issue. A company’s reputation is also liable to influence its appeal in terms of the recruitment of new talent. No. 22 in 2008.
11. Consumer demand shifts
12. Emerging markets: complex cultural, economic and political differences, to be planned for and overcome
13. Globalizing the enterprise: a risk attached to the emerging markets. A company’s expansion on several markets 14. facilitates a risk diversification essential to the company’s continuity, but brings new perils.
15. Emerging technologies – gaps in research and development
15. Capital allocation
16. Managing intellectual capital
17. Energy shocks
18. Inability to innovate: a corporate culture not conducive to innovation
19. Intellectual property rights
20. Infrastructure risks
21. Shifting demographics
22. New owners
23. Model risk
24. Supply chain and extraprise
25. Managing new business models
The 25 risks listed in the EY and OA survey are essentially strategic and financial risks to be taken into account by the managers of companies in decision-making processes. Downstream of these risks, line managers are faced with concrete issues calling for routine risk handling measures. Corporate risk monitoring must take place at all levels of the company through top-down and bottom up approaches, those affected by the different company risks being distributed throughout the value chain. Only a consolidated approach will generate a relevant procedure for the arbitrage of risk handling at global level, while retaining the level of detail necessary for management of the Company’s operating risks.
Sources: Ernst & Young, « The 2009 Ernst & Young business risk report, The top 10 risks for global business »
business_risk_report.pdf
[1] Sectors: wealth management, motor, telecommunications, banking, oil, gas and electricity, insurance, services, real estate and media.
[2] The major risks identified are those cited most frequently by companies participating in the EY and OA survey.