Beyond the profound health and economic uncertainty of our current moment, catastrophic events are expected to occur more frequently in the future. The digital revolution, climate change, stakeholder expectations, and geopolitical risk will play major roles.
The digital revolution has increased the availability of data, degree of connectivity, and speed at which decisions are made. Those changes offer transformational promise but also come with the potential for large-scale failure and security breaches, together with a rapid cascading of consequences. At the same time, fueled by digital connectivity and social media, reputational damage can spark and spread quickly.
The changing climate presents massive structural shifts to companies’ risk-return profiles, which will accelerate in a nonlinear fashion. Companies need to navigate concerns for their immediate bottom lines along with pressures from governments, investors, and society at large. All that, and natural disasters, too, are growing more frequent and severe.
Stakeholder expectations for corporate behavior are higher than ever. Firms are expected to act lawfully but also with a sense of social responsibility. Consumers expect companies to take a stand on social issues, such as those fueling the #MeToo and Black Lives Matter movements. Employees are increasingly vocal about company policies and actions. Regulator and government attention is reflecting societal concerns in areas ranging from data privacy to climate.
An uncertain geopolitical future provides the backdrop for such pressures. The world is more interconnected than ever before, from supply chains to travel to the flow of information. But those ties are under threat, and most companies have not designed robust roles within the global system that would allow them to keep functioning smoothly if connections were abruptly cut.
Companies require dynamic and flexible risk management to navigate an unpredictable future in which change comes quickly. The level of risk-management maturity varies across industries and across companies. In general, banks have the most mature approach, followed by companies in industries in which safety is paramount, including oil and gas, advanced manufacturing, and pharmaceuticals. However, we believe that nearly all organizations need to refresh and strengthen their approach to risk management to be better prepared for the next normal. The following discussion describes the core of dynamic risk management and outlines actions companies can take to build it.