Strategic Risk Management on the Rise – World Economic Forum Publishes Annual Global Risk Report

Friday, 24. January 2014

It is that time of the year again when leading politicians, business people, academics, and intellectuals from all over the world gather in the idyllic Swiss ski resort of Davos to discuss current global challenges at the World Economic Forum’s annual meeting. Prior to the event, the World Economic Forum has released its Global Risks 2014 Report. The report not only provides a forecast of the key risks that most likely will demand our attention in the next five to ten years, but also looks at current trends in risk management and suggests strategies for companies to build resilience to the shocks from systemic global risks that may impact them in unexpected ways.

Global Risk Landscape 2014

The Global Risks Report features the results of a large scale survey conducted by the World Economic Forum in cooperation with a number of university and non-university partners in October and November 2013. Over 700 leaders and decision-makers were asked about 31 potential risks grouped under five classifications – economic, environmental, geopolitical, societal, and technological. As the ten global risks of highest concern in 2014, the experts identified:

1. Fiscal crises in key economies
2. Structurally high unemployment and underemployment
3. Water crises
4. Severe income disparity
5. Failure of climate change mitigation and adaptation  
6. Greater incidence of extreme weather events (e.g. floods, storms, fires)
7. Global governance failure
8. Food crises
9. Failure of a major financial mechanism/institution
10. Profound political and social instability

As Klaus Schwab, Founder and Executive Chairman of the World Economic Forum, comments in the preface of the report, survey respondents “placed economic and social issues firmly at the top.”

The risks considered most likely and most impactful are primarily economic, societal, and environmental in nature: fiscal crises in key economies, structurally high unemployment and underemployment, severe income disparity, failure of climate change mitigation and adaptation, water crises, and greater incidence of extreme weather events. However, technological risks, such as cyber-attacks and the breakdown of critical information infrastructure, were also considered to be critical.

Source: World Economic Forum
Fig. 1 Global Risk Landscape 2014

The report not only lists the individual risks, but also examines and illustrates the complex interconnections and interdependencies between them (Fig. 2). This “underscore[s] the need for effective global governance and a better understanding of causes and consequences to be able to prepare for, mitigate and strengthen resilience to these risks,” the authors of the study write. The risks perceived to be most interconnected with other risks are macroeconomic – fiscal crises and structural unemployment/underemployment. Overall, there are strong links between macroeconomic and social issues, such as rising income inequality and political and social instability.

Source: World Economic Forum
Fig. 2 Global Risks 2014 Interconnections Map

Current Trends in Risk Management

Over the past decade, risk management has gained significantly in importance across industries, the report states. “In general, there is a trend away from technical planning for individual risks and towards holistic planning for a range of unspecified risks,” the authors observe. This trend is caused by the fact that due to a large number of crises and disasters in recent years managers have come to realize that globalization also has its drawbacks. Increasing interdependency and interconnectedness have made businesses more vulnerable than ever. At the same time, risks have become much more difficult to predict.

Another key trend is that risk management is increasingly approached from a “more strategic and enterprise-wide perspective.” This is demonstrated by the fact that more and more companies create the position of Chief Risk Officer who reports directly to the CEO and the board. “Having the chief risk officer report to the top makes possible a more holistic approach to risk, where previously individual departments might have argued only for addressing risks that specifically affected them,” the authors conclude.

The results of the survey also indicate that the risk analysis and management process is rather similar across most companies. However, there are great differences in the ways in which each step of the process is carried out (Fig. 3). For example, while in some leading companies risk management is still limited to qualitative analysis through meetings and discussions, others utilize more formal deliberative techniques, such as scenario analysis, stress tests, and ranking/scoring metrics. Only few companies, though, are already using special software for strategic risk management.

The authors conclude: „In most firms, risk assessment is now a highly formalized process conducted systematically and regularly, whether annually, quarterly, monthly or continuously. In some firms, risk assessment is part of the process through which the senior leadership defines the firm’s willingness to assume certain risks as a matter of high-level corporate strategy.”

Source: World Economic Forum

Fig. 3 Risk analysis and management process

Strategies for Dealing with the Global Risks of the Next Decade

In order to minimize the likelihood and impact of global risks in the future as much as possible, the report suggests close strategic collaboration between companies/competitors, governance, research institutions, and civil society. “The public and private sectors must establish channels for structured dialogue, interaction and coordination to more comprehensively understand risks before they manifest and to more effectively manage them when they do,“ the authors argue. Such a dialogue is vital to build mutual learning and trust. First signs of a cultural shift towards the creation of public-private partnerships to address catastrophic risks are already visible, the authors observe.

Another prerequisite for addressing global risks, according to the report, is the shift “away from a focus on quarterly results or daily share-price movements” to a “culture of longer-term thinking.” The creation of the position of a Chief Risk Officer, reporting to the CEO and board, already is a step in the right direction. However, it needs to be accompanied by additional measures, such as a complete overhaul of the manager incentive system.

Global risks affect all of us in one unexpected way or another. In order to better predict, understand, and manage these risks and their potential impact, we need excellent observational and analytical skills, a holistic approach, a long-term perspective, and close collaboration between the key stakeholder groups. These are the main takeaways from the Global Risks 2014 report.

The full report can be found on the World Economic Forum’s website.