Businesses feel unprepared for economic risks

Most business leaders feel that they are ill prepared to deal with the biggest economic risks stemming from the financial crisis, according to an influential new study.

Serious economic risks caused by the downturn, such as the increasing cost of credit, currency fluctuations and customer or supplier insolvency, dominated the minds of most of the executives polled in the study. But most of them felt poorly prepared to handle these risks.

Around 600 board level-executives were asked to identify their top 20 risks and describe how prepared they are for them. Among the top ten global risk priorities, all of the risks were either directly or indirectly related to the economy.

The cost and availability of credit topped the list, followed by currency fluctuation, insolvency risk, loss of customers, major asset price volatility, cancelled orders and the risk of excessively strict regulation. The report categorized these threats as ‘exogenous risks’ because they cannot be mitigated directly using insurance or internal risk management.

The dominance of the economy in the risk thinking of the business leaders seemed to indicate that other risks were being sidelined. Environmental, health and natural hazard threats were all relatively low priority on the executives’ risk lists.

“Good risk management needs to take in to account the broader risks and potential threats.

Lord Levene, chairman of Lloyd's

Lord Levene, chairman of Lloyd’s, which commissioned the research by the Economist Intelligence Unit, warned businesses that recent events, or high impact risks, should not overshadow longer tail risks, such as climate change.

‘It is completely understandable that companies focus on the latest problem, but good risk management needs to take in to account the broader risks and potential threats, and keep an eye on the horizon. What will disrupt business tomorrow is just as important as what is faced today,’ he said.

Another finding was that the executives felt comfortable managing internal risks such as reputation and corporate liability. But the authors warned against overconfidence. They said the report indicated a great disparity between what companies think threatens them and what their exposure to a particular risk actually may be.

Added Lord Levene: ‘Business leaders must not be over confident in how prepared they think they may be…in a recession the speed at which customers or suppliers will escalate litigation must be considered.’

Risk managers have a key role to play in ensuring a companies reaction to risk is sensible and accurate, he added. Indeed, the research indicated that, in the wake of the financial crisis, risk managers are now taking centre stage as boards apply more stringent filters to business activities and seek to fully assess threats. ‘For risk managers, these are highly demanding times,’ said the report.