Top Risks Reflect Unsure Business Environment

Executives and board members see economic conditions and regulations as the top risks for organizations, a survey found.
Caroline McDonald

The top two risks identified by executives send the message that they are more concerned with what they don’t know, regarding economic conditions and regulations, than with what they do know, even about significant operational risks, according to an author of the study Executive Perspectives on Top Risks for 2013.

James DeLoach, a managing director at Protiviti and a risk management expert, said the study, conducted with North Carolina State University’s ERM (enterprise risk management) Initiative, suggests “the importance of policymaking and of politicians and government to create an environment that is more predictable, to take the cap off of the economy.”

While the top risks pertain to strategic and macroeconomic issues, “Five of the top-10 are operational issues, but they are in the bottom half,” he explains. “That says that directors and executives are more concerned about what they don’t know than what they do know.”

The survey asked more than 200 board members and executives across a wide variety of industries about the risks their organizations expect to face in 2013. Participants were asked to rate a list of 20 risk issues on a scale of one to 10, with one indicating “no impact” and 10 indicating “extensive impact.”

The two risks that stood out as being of highest concern were:

• Perils relating to profitability constraints because of economic conditions that could curb growth.

• Possible regulatory changes and heightened regulatory scrutiny that could curb the production and delivery of products and services.

“What that says is that most people are used to a more rapidly growing environment,” DeLoach said. “We’re growing in the U.S., but at a slower pace. People are trying to get used to that, but it’s a different game than they have been used to over the course of their careers.”

That issue, he said, “is paramount as a significant impact risk. [Company executives] are having to modify their approach to the market…given the fact that we have slower growth in the economy.”

The second, regulatory risk, was significant for most of the survey respondents, "when you think about Dodd-Frank in financial services and the Affordable Health Care Act, which affects health care providers and also their cost structure,” he says.

Citing a second example of regulatory pressures, the risk management consultant cited the restaurant and consumer products industries which face issues like those stemming from the Foreign Corrupt Practices Act anti-bribery provisions “and the unprecedented prosecutorial cooperation across borders on corruption issues.”

A third risk, he says, is related to growth opportunities and companies’ being restricted “by the uncertainties surrounding political leadership for national and international markets, particularly in developing countries with political stability issues.”

While companies understand their operational issues and are concerned, DeLoach said, “when you’re talking about the issues around regulatory risk and the growth in the economy and political issues, that creates an environment of uncertainty that makes it difficult to hire and invest.”

What this does, he said, is change the game of planning away from one-dimensional strategies. “In these rapidly changing times, if you set strategy with a single view of the future, that can be very dangerous. You have to have multiple views of the future, assess scenarios and stress test your plan,” he explains.

What’s more, one of the operational risks identified was resiliency and adaptability. “To be adaptive means you have to shift and change as markets evolve and customer preferences change,” he says.

Other survey highlights included:

• Most respondents rated the current environment as significantly risky and said they're likely to make changes or deploy more resources to managing their respective risk over the next year.

• Chief risk officers (CROs) and CFOs were the executives with the highest ratings in terms of their likelihood to make changes.

• The biggest outfits rated the greatest number of risks as “Significant Impact” risks, reflecting the complexities of their operations.

• Companies in the financial services, health-care and life sciences, and technology, media and communications organizations industries reported the greatest number of significant risks.

• Information-security breaches and cyber threats with the potential to disrupt core operations ranked high on the list of challenges, with financial services, technology, media, and communication companies most concerned.