Opinion: Beware of the risk of risk blindness
The pandemic has exposed the failure of many boards to effectively understand and predict risk. A large number have been blind to the impact of risk on their organisation. As a result, numerous organisations have suffered losses or have had serious problems and are in danger of failing or have gone under.
Being aware of and properly planning for risk is a vital task for any business. Though bear in mind effective risk management is not only about avoiding losses but in enabling value creation through improved business planning, organisational efficiency and enhanced social licence. Importantly, effective risk planning can provide a new opportunity, a competitive advantage, to drive long-term business success.
It’s up to boards to be at the forefront of identifying, planning and reacting to risk. After all, they are charged to generate the best return from the capital of the company which demands forward thinking and the ability to anticipate 'the effect of uncertainty on outcomes'.
Why boards fail when planning for risk
Most boards understand the mathematical factors of risk – the impact and probability of adverse outcomes. Unfortunately, too many boards are poorly prepared and blind to risk due to human factors. Here are six of the factors that contribute to risk blindness.
- Recency There’s a tendency for directors to put a greater weight on recent events than on the probability of risk. The classic example is where we may check airline reservations in the wake of an aircraft accident. Travelling on an aeroplane is statistically the safest way to travel, but it’s easy to overly focus on airline safety after a recent accident with this form of transportation
- Visibility As humans we put disproportionately focus on visible risks. For example, we focus on physical health and safety regulations, but are blind to the less visible but potentially more harmful impact of psychological harm in our workplaces.
- Assumptions Too many boards make assumptions about risk, for example, playing down the impact of a potential future pandemic on their business by assuming that the pandemic will be simply influenza, or it is most likely to be a mild Swine flu and not a more damaging SARS like illness.
- Excess or lack of confidence Some boards have overconfidence, a culture of hubris, which can mean they ignore or don’t plan adequately for different risk factors. Conversely, some boards have under-confidence which can lead to overestimating the impact of certain risks.
- Skills We don’t know what we don’t know and boards that don’t have the appropriate skills to understand the risks relevant to the operation of their business can be blissfully blind to those that their company is taking on.
- Culture The culture, “what we do when no one is looking” can be a fundamental enabler or have a negative impact on a business. A culture of candour, where bad news comes to the board faster than good news and where there is a willingness to learn from risk failures and mistakes will better equip the board to avoid risk blindness. A poor culture, that does not encourage candour may mean a board fails to discuss the risks and be risk blind.
How to effectively prepare for risk
It is timely to properly prepare for risk. After all, it’s good governance that’s critical to the long-term success of any business. Boards must therefore have the foresight to assess risk as part of their strategy and business planning. They need to have a culture of openness, one that enables them to challenge assumptions around risk. The board must expect the unexpected, and also be able to adapt speedily and move quickly in a fast-changing environment, because all risk is dynamic. Importantly, they should have a willingness to learn from their risk failures and mistakes.
When planning for risk, boards need to start by looking at the normal risks around the operation of their business: the cash flow, workspace, health and safety, contracts with staff and suppliers, for instance. One aspect of operational risk they often fail to consider is systemic risk – an event that could cause a major collapse in the broader economy.
A good example is the shortage of shipping containers which caused huge delays to products being distributed around the world due to Chinese New Year coinciding with the outbreak of COVID in China in 2020. Then, more recently, the Evergreen container ship being stuck in the Suez Canal, which caused considerable disruption to the global supply chain. Then there’s simply the operational risk of a poor strategic business decision-making – something that can lead to the failure of many a business. A good example here is the airline Norwegian which was wrong to attempt to compete with the incumbent airlines on the transatlantic routes. Its strategy appealed to neither the bucket and spade brigade or business travellers, when it would have been better to focus on one or the other. Now it’s trying to stave off bankruptcy.
For risk planning purposes, cybersecurity is a huge issue, one that’s growing more important by the day. For instance, state actors and criminals are using increasingly clever phishing emails to trick the recipient into opening them, which can then cause huge damage to an organisation. To be cybersecure boards need to know what are their ‘crown jewels’ that they need to protect from being stolen or damaged. In a software business this might be code, and in healthcare the patient records. Organisations need to ask how these are protected and when was the last time someone checked the protection was still valid as threats evolve. Also, is there awareness of the reporting obligation in light of a break in, and appropriate insurance cover?
The type of business model you have impacts on the risk to your business and whether you end up as a winner, loser or a dodo. It’s those who have undertaken a digital transformation of their business who have a much-improved risk profile, and therefore the potential to experience less impact from exposure to risk. Also, those that are flexible and can quickly pivot their business model when exposed to risk, for example a fine dining restaurant providing takeaways and meal kits customers can cook at home during the pandemic, have fared much better than those who haven’t.
The pandemic has highlighted that boards need to take risk seriously and not be blind to it. It’s by having the foresight to plan for risk objectively, having a culture of openness, challenging assumptions around risk and being able to adapt fast that will ensure boards are well positioned to spot and turn any future risk to their commercial advantage, and secure the long-term survival of their organisation.
Bio: John Harte, Managing Partner at Integrity Governance
John Harte leads a global team at Integrity Governance that is focused on making boards more effective. A boardroom expert working with multinationals, SMEs, trade associations and not-for-profits, he provides practical, impartial advice to directors, business owners, executives and CEOs, to help improve board performance. John and his team have advised the boards of organisations in the UK and around the world since he founded Integrity Governance over 16 years ago. He has 30 years of experience at director level in the corporate world, having worked at blue chip businesses including: Mars, Schroders and Goldman Sachs. He is an in-demand speaker and thought leader on board effectiveness, practical governance and business disruption.
5 Minutes With PwC's Amanda Line on Digital Leadership
1. Define digital leadership, and what it means to be a digital leader?
Leadership has always required a specialised set of skills, such as curiosity, empathy, and decisive action. In today’s world, there is an urgent need for a new type of leader – one who has a digital mindset and has the skills to drive transformation. With the ever-expanding spectrum of new technologies, we need a new wave of digital leaders who not only understand the application of intelligent technologies in the workplace, but also know how to enable and empower their teams - and that comes from frequent upskilling. Digital leaders are represented across numerous sectors and industries, with a common goal to drive a culture of innovation and transformation.
2. What do you believe are the essential traits of a digital leader?
Knowledge of digital and data literacy is a given essential to have a strong command of the future economy. In my opinion, what’s even more important are human-centric skills. It is the soft skills such as communication, resilience, emotional intelligence, and entrepreneurial thinking that are pivotal in this new-age digital world.
Despite the demand for future skillsets, we’re currently facing the biggest skills shortage of our lifetime. PwC’s Middle East CEO survey highlighted that 80% of CEOs believe that a shortage of skills in the workforce is one of the key threats to their organisation’s growth prospects.
Part of our drive at PwC’s Academy Middle East in leading the upskilling revolution in the region is to facilitate lasting change. We deliver innovative and practical training, that includes both digital and soft skills components, for individuals and organisations across industries to create a truly future-ready workforce in the Middle East.
3. How have these traits changed since the outbreak of COVID-19, or have they remained the same but their significance has grown?
Prior to the pandemic, the World Economic Forum set an ambitious target to upskill one billion people by 2030. This was initiated to tackle the 75 million jobs expected to be displaced by automation and AI by 2022. Since Covid-19, the window of opportunity to reskill has become shorter in the newly constrained labour market.
The way we live, work and learn has changed drastically, placing digital technologies at the forefront. The pace of change has accelerated the need for upskilling and reskilling. In many organisations and economies, this crisis has highlighted the discrepancy between the skills people have and those needed for jobs in the digital world.
4. What was the role of a digital leader when the initial outbreak happened?
The need for digital leadership was brought to the forefront by the pandemic. With the huge transition to work from home (WFH), strong leadership has helped guide and steady employees, and ensure continued productivity. Leaders who understand the application of technologies in the workplace have been able to create new drivers for success, including streamlining operational systems, mindful connection of their employees and improved agility in the workplace.
5. How has that role evolved and what are the next steps for digital leaders going forward in 2021 and beyond?
Eighty-four percent of employers are set to rapidly digitalise working processes, including a significant expansion of remote work—with the potential to move 44% of their workforce to operate remotely. This is a very significant change towards a digital future. Technology is moving at a rapid pace, and having digital skills is no longer a ‘good to have’, it is critical to business success. Leaders and employees alike must adapt to a cycle of constant learning and upskilling to remain competitive.
6. How do these roles mentioned compare to pre-COVID?
Digital leaders were in demand before the pandemic, but now there is an additional urgency for a pipeline of talent with the skills to implement new technologies in the workplace. In order to create sustainable success, digital technologies must be adopted as a core business strategy – and upskilling is key. In 2020, PwC’s Academy introduced a number of qualifications in the region to support training for the digital economy, including the region’s first qualification for AI, the Certified Artificial Intelligence Practitioner (CAIP).
7. Whilst the initial strategy for digital leaders was to survive the outbreak, what is the strategy for digital leaders as they look to thrive going forward?
We will see more sophisticated technologies being integrated into the workplace, driven by digital leaders. To support these transformations, we will need to close the existing skills gap, and ensure that younger generations are prepared for the future workplace.
Young professionals will need huge investment in education and skills development. This requires a collaborative effort from governments, private organisations and education providers. In the Middle East for example, PwC’s Academy is working with the regional governments to upskill the national talent for future leadership roles. We also work with the private and public sector for upskilling solutions in finance, tax, HR, marketing, leadership and management, graduate development, digital transformation to name a few. It is this multi
faceted approach to upskilling that will help our region to thrive.