1Chapter 1 - Risk Management in a Global World
The new risk management ‘normal’ includes a paradigm shift. Technology continues to develop and change at a lightning pace. Socioeconomic forces are shifting. Collective revulsion at income inequality is growing. Concern about human rights, climate change and the environment are prominent issues in global forums and legislative bodies. Natural resources are being depleted at an astonishing rate. Population growth is accelerating at an unprecedented pace in the developing world. All these issues--and many others--are contributing to a fundamental shift in how we should be thinking about the world, and by extension, risk management. Given how interconnected the world is, a challenge in one country or region can quickly have implications on the other side of the world. Global risks transcend borders and are inextricably linked with each other.
2Chapter 2 - Risk Management as a Process
Risk is often treated like a discrete time-defined event rather than a process. The most commonly used methods to ‘control’ risk are annually renewable insurance policies, employee manuals and other check-the-box processes that are verified infrequently over the course of a year, or over many years. The challenge arises from the placebo effect these methods create. They do well in creating a sense of security, but often fail when it comes to identifying and managing risks that may be lurking in the recesses of an organization’s processes, and the actions and minds of its people. When the external forces at play in our turbulent world are added in, it is clear that new solutions must be added to the risk manager’s arsenal in order to stay ahead of the risk curve.
3Chapter 3 - The Risk Continuum
Organizations that fail to adequately anticipate long range risk--the risk continuum--often search for causality while ignoring change. Far too often certain ‘truths’ are held as constants, such as price of oil at $100 barrel or perpetually rising home values, and the entire edifice of an economy or company can be constructed on a weak foundation. Stress testing these long term risks is often impossible because they tend to emerge after many years of ‘normal’ performance, during which time multiple rounds of leadership change have likely occurred and collective amnesia has set in. The confluence of emerging sources of influence that were not contemplated when ‘normality’ was established often disrupt entire business models and national foundations.
4Chapter 4 - Complexity Reduction
Values sometimes matter the most when they are least convenient. As shown in the global decline of trust of government and business, paying lip service to organizational value systems while not believing in and upholding them presents a problem and seriously hinders both decision making and risk management. Failure to adhere to values can also severely harm brand equity and market capitalization. Corporate and national values--and the people that rally around them--are the first and last line of defense against many of the man-made risks affecting our world. From climate change to cyber risk and terrorism, a values-based response is often not only appropriate, but strengthens organizational resilience, combats complexity and improves overall decision making.
5Chapter 5 - Three Dimensional Risk Management
Risk management is sometimes thought of as a necessary evil, increasingly consigned to being an adjunct to compliance, finance and other so called ‘business prevention’ functions. In too many organizations, risk management is considered little more than a ‘tick the box’ task that sales teams must maneuver around on their way to board level approval. Such an approach is a prescription for disaster, but that does not stop many individuals within organizations--and even the organizations themselves--from simply going through the motions of risk compliance. Three dimensional risk management offers a new framework for an increasingly punishing and interconnected world. In this approach, risk management is not merely a quantitative preventive feature, but rather an embedded firm-wide decision making framework that makes using risk management to thrive in business an organizational imperative.
6Chapter 6 – Terrorism
For hundreds of millions of people in the developing world, the wealth generation that globalization that was supposed to create has not trickled down to them. Whether the contributing causes are endemic corruption, hopelessly inefficient state enterprises, inadequate infrastructure, or an insufficiently developed private sector, this perceived inequality is helping to fuel the rise of global terrorism. What many in the developing world fail to recognize is that income inequality is a global phenomenon, not just negatively impacting the developing world. Reducing the gaps in resources, personal and national incomes, infrastructure and technical skills will be one of the great challenges of the future.
7Chapter 7 - Economic and Resource Nationalism
The propensity for natural resource-rich nations to lash out at foreign investors is profound, and likely to grow. To maintain their footing, managers must place renewed emphasis on strategic planning and forward looking risk management--at all phases of the trade and investment process. Being ‘reactive’ is no longer sufficient. Corporate managers must consider how to reevaluate existing activities and analyze new opportunities in light of the rapidly changing global investment climate. The best way to address these risks is to establish risk management procedures that ask the right questions and establish effective methods for managing risk--before it becomes an issue. The ability to conduct realistic and effective international scenario planning and stress testing is essential.
8Chapter 8 - Climate Change
The battle lines that have been drawn between climate change believers and deniers could not be more distinct. However, outside of the halls of power and beyond diplomatic chatter there is a subtle, if imperceptible shift heralding a potentially more impactful climate awakening. Those favoring grandiose solutions to the very real challenges posed by climate change will find no victory with the advent of true market-based solutions to climate risk. These shifts in the market are brought forth without presidential decree and signing ceremonies. Rather, they are brought about the same way each economic revolution occurs--with the inexorable drive among entrepreneurs, engineers, planners and risk managers tackling the immediacy of problems, with practical solutions for which the market is willing to pay.
9Chapter 9 - Cyber Risk
The internet in a hyper-connected world is at the same time a source of risk as it is a source of great reward. Just as easily as tech titans in Silicon Valley can harness technology to create incalculable economic value, criminals, nations and terrorists can use technology to cause great harm. The citizens of nations all over the world are in many ways the bystanders and the victims of this drama and their civil liberties and right to privacy are collateral damage. On the one hand the creation of stronger cyber security solutions and encryption standards makes legal transactions safer. On the other hand, these very hyper-secure tools and methods fall into the hands of tech trouble makers. The blurred lines between security and privacy continue getting obscured and the most sacrosanct of Western values are being called into question.
10Chapter 10 - Corporate Social Responsibility
CSR is an intricate and expanding landscape of interconnected pursuits and obligations that include environmental management, eco-efficiency, responsible sourcing, stakeholder engagement, labor standards, working conditions, employee and community relations, social equity, gender balance, human rights, good governance, and anti-corruption measures. Once a firm dives into the CSR pool, it can quickly become overwhelmed as it tries to establish itself as a good corporate citizen, while at the same time wanting to prove that it is genuine in its beliefs and its efforts. CSR has become such an integral aspect of doing global business that any firm that is active globally must have a CSR philosophy and plan of action--for its own benefit and protection.
11Chapter 11 - Country Risk Management
Too often companies get caught in an ‘investment trap’: they commit long-term resources to a country only to find that the bill of goods they were sold--or thought they understood--turned out to be something completely different. After the investment has been made, it is usually too late to withdraw without incurring large losses and experiencing reputational risk once the story hits the press. A risk manager may have the right information, but based on a short-term assessment of the risks. The long-term view may be completely different, but in the absence of knowing what questions to ask and having clear lines of communication, the right information may not be taken into consideration. The simple way to limit the possibility that unforeseen events will occur is to establish clear reporting lines and really do your homework.
12Chapter 12 - Transactional Risk Management
Effective Transactional Risk Management requires the ability to distinguish emerging events and trends that pose true risks from events that are merely dramatic. When assessing political stability, the focus should be on the legitimacy of state authority, the ability of that authority to impose and enforce decrees, the level of corruption that pervades the system of authority, and the degree of political fractionalization that is present. Where economic policy is concerned, the focus is more along the lines of the degree of government participation in an economy, the government's external debt burden, and the degree to which interest groups can successfully obstruct the decision making process. Although there are a number of ways to protect a firm, proper planning and due diligence are the most important.
13Chapter 13 - Anticipatory Risk Management
Anticipatory Risk Management may be defined as a permanent orientation toward understanding and embracing future risk, generating mitigation strategies to address those risks, and integrating them into the planning, operation, and risk management functions of a business. So often businesses are focused on the short-term (i.e. the competition, consumers, and profits). ARM requires that the orientation toward the medium and long-term future must be permanent, strategies to mitigate them be realistic and achievable, and their integration into the core functions of a business be seamless. Thinking about risk management as a business enabler means embedding risk assumptions within a company’s overall growth plans and strategy, so that they overlap, rather than function in separate silos.
14Chapter 14 - Risk Governance
Given the range of challenges organizations confront, and number of actors on the stage, the solutions are unlikely to be simple and straight forward – rather, by definition, they will be complex and ambiguous. As it is clear that a meaningful approach to risk governance cannot be achieved in isolation, a diverse range of actors that an organization may not have been accustomed to including in the decision making process should become part of that process. To have the best chance of success, agile risk managers and decision makers should strive to include representative members of civil society in the decision making process, to ensure a broad range of opinion and obtain broadly based ‘buy-in’ to whatever decisions are arrived at. Doing so will encourage a more rigorous and thoughtful process.
15Chapter 15 - Conclusion
As risks have evolved from being phenomenological occurrences in the natural world, the twenty-first century is in many ways the era of man-made risk and man-stoked fires. From cyber risk (which is increasingly mutating to impact all facets of the modern economy) to terrorism and reputation risk, mounting a credible defense to these risks requires as much soft skill as it does technical risk and analytical capabilities. Moreover, twenty-first century survival depends very much on our ability to harness risk, encourage bounded risk taking, and improving overall organizational and societal resilience. Like no time in human history has the notion of risk and resilience has taken center stage. Our individual and collective decision making are the chief actors in this drama. In our hard stance against the gods, it may feel like we have won, yet we find there is no one else to turn to for the answers.