Following the release of Leadership in Risk Management: European Report 2020 from Mazars, Board Agenda and INSEAD, we spoke to Anthony Carey, partner and head of board practice at Mazars in the UK, about why resilience matters for Covid recovery plans, filling in board level knowledge gaps and the likelihood of governments tying rescue packages to action on climate change.
The report focuses on how prepared businesses feel to respond to Covid-19 and to gauge their changing attitude to risk. Why is risk management important for businesses today?
We are living in a period of unavoidable business risk. Technology, Covid-19, changing societal attitudes and geopolitical risks played out in trade disputes have come together at the same time to underline the complex, risk-filled webs that a business has to navigate. Those forces are not isolated: technology has changed societal attitudes to business by allowing the sharing of information whether a business wants that information shared or not.
That is why risk management is crucial: a business cannot avoid risk – in a market economy profit is the reward for successful risk-taking. But it needs to make sure it is seizing the right opportunities and knows to walk away when the risk/reward ratio does not add up. The report and its associated survey return a fairly strong bill of health for risk management: just over half of board members (55%) say they were prepared for the pandemic and nearly all (96%) report their controls and processes to have performed well.
Do those positive responses surprise you?
Businesses are always vulnerable to how the economy moves and to wider shocks in the market, so they should always have processes in place to deal with them, that said recent falls in economic activity have been the greatest in many countries for almost a century.
What has been particularly positive during Covid is the speed with which businesses have innovated when they needed to do so. Many businesses should be proud to have learned that about themselves, and should ensure they keep that resilient, adaptive approach and build on it going forwards, especially as there is currently huge uncertainty about when the impact of Covid-19 on the global economy will start to ease.
There is a lot of talk of resilience in the context of the pandemic – how does resilience relate to risk management?
Resilience is about ensuring you have the strength to deal with the unexpected. Until recently we spoke about risk as if it were predictable. Covid has illustrated what resilience means: knowing that risks can crystallise at any time and being able to successfully cope with them.
That’s where the importance of people comes in: a business needs the right team of people in place to respond whatever happens. In a big crisis like Covid, there will be winners and losers. Some businesses that went into Covid in a relatively weak position will have been able to respond well and come out stronger, and sadly the other way around if their response was poor. In most cases a positive outcome will be thanks to their processes and above all their people and their ability to fulfil their individual roles well and to work effectively as a team when the going was tough.
The report reveals almost half of respondents are not confident their boards receive all the information required to overcome risks. What’s your advice in order to make improvements?
There are two issues that need to be addressed here. First is to make sure that if businesses do not have all the necessary information then they take care with the decisions they are making in the meantime though as the pandemic has shown, you can’t take away uncertainty about the future. Second, the question is whether businesses lack the information completely or if the issue is that the information is not getting to the board, and why that might be. If management does not have the information necessary to consider the risks it faces, then it undermines resilience and should be a wakeup call.
That finding also raises the possibility that board members themselves are lacking knowledge on more recent business critical issues. Just 34% of boards are seen to have knowledge of climate change, by contrast that figure is a resounding 91% when it comes to finance. Boards therefore must think about challenging traditional board hiring practices and find some new board members that bring expertise in areas such as climate change and cyber.
Alternatively, retain current board members but reinforce their expertise by bringing in external advisers on the areas where existing knowledge is less strong. Half of respondents say they have changed the diversity of board membership to strengthen risk management challenges. That shows boards are moving in the right direction, bringing in new skillsets and backgrounds for new challenges.
You predict in the report that governments are likely to tie rescue packages into climate change improvements, why is that?
Covid-19 has shown how interconnected government, business and society are today. The impact of the virus has led to businesses relying enormously on government, in terms of loans and grants, and that involvement looks set to continue for months to come. As governments around the world are under pressure to deliver on climate change action, it is reasonable to expect businesses to return the favour by agreeing to climate change commitments as part of receiving rescue and recovery packages going forwards. It also makes good business sense and is the right thing to do from an environmental perspective.