Most Overlooked Business Risks
Strategic risk management shines a light on those unforeseen events that can topple even the strongest business bastion. But sometimes, the most perilous threats are those hidden in plain sight.
In a Black Swan era – when “expected” events like political uprisings in faraway nations and natural disasters close to home seem almost commonplace – companies are trying to get a better grasp on overlooked risks. These aren’t always easy to ferret out because by their nature, these types of risks are often well hidden or in their infancy. Sometimes, though, they’re not hidden at all. Attention is usurped by other more pressing risk management concerns—a perfect example of “out of sight, out of mind.”
If something is not on the media’s radar screen, companies pay less attention to it.
Uncertainties inherent in today’s economic environment are challenging business’ ability to innovate.
Corporate boards and c-suiters are beginning to focus on reputation and social media risk.
“If something is not on the media’s radar screen, companies pay less attention to it,” says Max Rudolph, a member of the Society of Actuaries (SOA) Board of Governors who oversees the organization’s annual emerging risks survey. The SOA’s surveys and the evolving field of behavioral finance highlight a common fallacy known as anchoring bias: the tendency to let recent events dominate our thinking about potential risks.
“Risks that are in the light tend to shrink while those in the dark tend to grow,” adds Rudolph. For example, because there hasn’t been a major breakout for a while, the risk of infectious disease is bigger. The risk of terrorism also grows as we get further away from 9-11. These risks don’t continue to get the same attention if a crisis abates, and thus they can catch a company off guard when they reoccur.” Here are some frequently overlooked business risks.
Intellectual Property issues have never left the company radar screen, but many have been baffled as to how to address the myriad problems associated with it. Theft of intellectual property costs U.S. businesses more than $250 billion per year, and FBI reports indicate that in many cases, employees stealing data are the main culprits.
“Intellectual property is a corporate asset of great value and something that we need to pay attention to,” confirms Jeffrey Parker, vice president, patent licensing at GE Licensing, who offers insight into how to better protect copyrights, trademarks, patents and “trade secrets” in the webinar, “Intellectual Property: A Reasoned Approach.”
Another inestimable form of IP risk is the impact of current IP laws, which some say are stifling innovation both in the U.S. and abroad. According to the 2012 GE Global Innovation Barometer, which surveys close to 3,000 senior business executives in 22 countries, one-third of executives believe that IP laws in their countries are not enabling innovation.
Given the importance of innovation as an economic driver, the fear of risk can itself be a risk: More than three-quarters surveyed reported a reduction or reevaluation of their company’s willingness to take risks, with a full 68 percent agreeing that businesses are taking few risks overall.
“This year’s study confirms a lot of what we’ve been seeing in the global marketplace, that the uncertainties inherent in today’s economic environment are challenging business’ ability to innovate,” said Beth Comstock, senior vice president and chief marketing officer of GE.
Daniel Diermeier, professor of managerial economics and decision sciences at the Kellogg School of Management, co-creator of Kellogg’s CEO Perspective Program, and author of Reputation Rules, says that corporate boards and c-suiters are beginning to focus on reputation and social media risk; for example, how corporate reputations can be affected by supply chain problems or how a few dissatisfied customers griping on the Internet can cause a company’s stock to plummet.
While companies tend to overlook “low stakes” reputational risks that have no immediate impact on the business, Diermeier points out that the period of low awareness is exactly when action is required. Early intervention is critical because companies can keep a problem from mushrooming into an issue that eventually drags down its reputation, sales or share price.
“Implementing an early warning system is particularly important with regards to reputational risk,” he says. “When it comes to financial or operational risk, there are already suitable tools in place, such as a quality management process, to identify risk as it emerges.”
Some companies are taking steps to catch reputational risk earlier. Diermeier points to Procter & Gamble, which adopted a strategy of “anticipatory issues management.” Dedicated teams at the consumer products giant are tasked with identifying the next threat and suggesting alternatives to senior managers. “The back-and-forth interactions between the tactical teams and senior managers leads to quick decisions, a quick response – and reduced risks,” he notes.