I remember a particular discussion that I had with my wife on the way to Durban in December 2019. Covid-19 had been in existence in China for sometime and was starting to spread to the rest of the world. If we are not careful, the impacts of this virus are going to be very dire. The world as we know it is going to change. I was a little bit uneasy with the turn that this conversation had taken because I had just gone through a significant period of change and was not interested in anymore.
It was if my wife’s words were prophetic. Looking at the change that we have experienced over the past year and a half, the words of Simon Pegg (Nerd Do Well) come to mind: suddenly, the world I had scrutinised for so long was all around me, as if I had leaned forward and climbed into the television like Alice through the looking-glass. I had no idea just how deep the rabbit hole would go.
It is not uncommon to find people, and companies, who have completely reinvented themselves during the crisis; others have found renewed fervour and commitment to their industry. Most of it has been deliberate change, and some of this reinvention is being driven by megatrends that are subliminal and unconscious. I recently read an article by EY which points out how these trends are unconsciously shaping us.
A world of cascading risks
The article points out that, of course, long-term risks are not limited to pandemics. They can include everything from climate change to debt crises and social unrest, and they merit serious attention. In a recent blog post, it was argued that we now live in a time when improbable events will occur not just with greater frequency, but also simultaneously — and that we are systemically underestimating the probability of such cascading risks.
The EY Megatrends report highlights a range of long-term risks that companies face in today’s market. While the megatrends focus on long-term forces spanning the social, political and economic realms, they can generate risks that are squarely in the business domain and have near-term consequences.
The article adds that, the Megatrends 2020 report, for instance, explores how we are increasingly operating in a techonomic cold war, driven by populist leaders with interventionist instincts and the race to dominate next-generation technologies such as electric vehicles and 5G networks. In this environment, businesses are increasingly likely to be targeted using a range of unconventional tactics, from company bans and blacklists to cyberattacks using weaponized disinformation.
It’s easy to see how the techonomic cold war heightens a range of risks for companies. At the broadest level, it creates new sources of geopolitical risk for global corporations that could find themselves enmeshed in geopolitical tensions. Companies face increased operations risk as global supply chains become vulnerable to trade wars and company bans. They face heightened intellectual property (IP) risk as the race between nations to dominate next-generation technologies increases the likelihood of governments intervening on behalf of domestic firms, including through corporate espionage and IP theft. Perhaps most significant, though, is the intensification of cybersecurity risk, as lines blur between state and non-state actors and a new kind of cyber-attack emerges: weaponized disinformation.
The EY article points out that the weaponization of disinformation — explored more fully in two other megatrends, synthetic media, and future of thinking — raises challenges for companies beyond cybersecurity. Businesses face increased reputational risk through the prospect of malicious actors deploying deep fake videos and other synthetic media to damage a company’s brand and reputation. Synthetic media could also be used to drive down a company’s stock price, creating new sources of financial risk.
“The next frontier of cybersecurity is disinformation,” says Kris Lovejoy, EY Global Advisory Cybersecurity Leader. “Deep fakes and other synthetic media can exact significant damage, and companies need to shore up their defences — whether through technology or training.”
Perception and inaction
If failing to address long-term risks can place companies in peril, why do businesses fail to adequately address them?
The article points out that, to some extent, this is a product of behavioural biases and flawed incentives. Behavioural economists have demonstrated that we tend to excessively discount future risks, meaning that we underestimate their likelihood and don’t give them the attention they deserve. Incentive structures typically amplify this behavioural penchant for short-termism. For instance, since managers are measured and rewarded based on quarterly financial performance, there is a disincentive to invest in risk mitigation efforts that might pay off in the long term but impose costs in the near term.
The reluctance to take on long-term risks may also be a result of how they are perceived. “Leadership teams often view long-term, strategic risks as beyond their control,” says Tonny Dekker, EY Global Consulting Enterprise Risk Leader. “For risks that are driven by larger forces, which management teams cannot control, such as geopolitics, managers may assume that there is little-to-nothing they can do to control or mitigate them.”
Drivers of distress
The content in the EY article paints a good picture regarding the future risk landscape for companies going into distress in the future. If these are not addressed effectively, roots of distress are formed.
The primary role of a BRP is to find the roots of the distress and help companies address them effectively. This also applies to companies who seek the help of BRPs before they become distressed. The EY article provides four simple steps that can be followed to do just this:
- Envision future states and scan for risks. Start with a scanning exercise to visualize future states and identify long-term risks. The EY Megatrends and similar forward-looking publications can provide a useful starting point for such an exercise. Ensuring that boards and management teams have cognitive and experiential diversity might similarly broaden thinking to identify risks that might otherwise be missed;
- Map trust journeys to prioritize risks. Risk and trust are intertwined, since implementing risk mitigation measures is one way to boost trust. Dekker recommends that companies use a trust journey framework in their approach to long-term risks. “Start by identifying the stakeholders most pertinent to your business,” he says. “For an electric utility, this might be regulators, while for a professional services firm, it might be employees. Then, identify the risks that matter most to your most important stakeholders — which you should then prioritize as the risks most critical to your business;”
- Conduct risk assessments to quantify risks. Once you’ve identified the risks most pertinent to your stakeholders and business, the next step is to use analytics to estimate the potential impact of these risks. This should take into account correlations between risks and their overall correlation with time, both of which make such risks more likely than they might otherwise appear. Quantifying risks provides a basis for understanding their impact on your business as well as for efficiently allocating finite resources;
- Build flexibility into strategic planning. These long-term risk assessments should inform your strategic planning. A key element of planning for long-term risks is to include optionality into plans, for instance, by building supply chains with redundancy and flexibility so that your global operations are more resilient to geopolitical risk.
The one constant in life is change. The above steps take years to formulate and analyse. But as Robin Nicholson stated in a recent thought leadership editorial on Turnaround Talk: As we move on from the Covid-19 Pandemic, the world will look familiar but will be remarkably different. Experienced BRPs know that they need to be agile, fast, and flexible in problem solving. Think clearly, act fast.
Jonathan Faurie is the founder of Turnaround Talk.