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Anticipating Adversity in an Unstable Environment

  • By John Drzik
  • Published: 1/14/2016
 globediceCompanies face a daunting task in navigating today’s global risk landscape. The world is confronted by an ever-increasing set of interconnected issues—pull one thread and several others are affected. Resilience requires a complex and nuanced approach.

The diversity and complexity of today’s risk landscape is reflected in the Global Risks Report 2016, prepared by the World Economic Forum with the help of Marsh & McLennan Companies and other partners.  
It is no surprise that the experts surveyed for the report rated geopolitical and societal risks as the issues of highest concern in the short term, along with related economic woes. This continues the trend from the previous year’s report, in which there was a marked shift toward these risk areas. Taking a U.S.-only slice of the data, cyberattacks and associated data theft or fraud are viewed as being of paramount importance. Looking to the longer term, concern continues to coalesce around environmental issues—water crises, food security, extreme weather, and climate change—with social instability both a threat and a consequence.  

Expectations of growing social instability

In addition to the refugee crisis, 2015 saw numerous anti-austerity protests in cities across the world, populist movements pressing for independence or regime change, online activist campaigns endorsed by millions of supporters, labor disputes, and terrorist attacks.  Some catalysts of unrest are economic, such as persistent unemployment in advanced economies or the sudden decline in fortune of many emerging markets. Others have their foundation in increasingly polarized societies or simmering geopolitical tensions.  

What we’re seeing now may not just be a passing phase of higher volatility. Resentment of a deepening income inequality is on the rise in many countries. In the coming years, this may be exacerbated by the increasing proportion of retirees with insufficient resources for their old age and the increasing loss of jobs due to the automation of workplace activity. A failure to properly integrate refugees into host countries will create a time bomb for the future.

This creates a very challenging context for business, especially when popular frustration with government and business leaders is widespread and levels of trust are uncomfortably low.  At a macro level, growing friction can act as a general drag on economic activity, at a time when positive impetus is sorely needed. The threat of business disruption is also higher, undermining the ability of international businesses to operate in certain countries or substantially changing the terms of operation. Activist-driven volatility (often fueled by advances in information and communication technology) can influence political decisions by fragile governments and provide a frame of reference for workforce disputes, intensifying disagreements between companies and local communities.

Anticipating adversity

To be better prepared for possible shocks, companies should consider constructing plausible worst-case scenarios from the adverse trends that might most affect them. This provides a platform for gauging which assets are at risk and the scale of the potential damage.  The best risk scenario planning involves thinking creatively about second and third order consequences—likely government responses and cross-border impacts, for example.  Companies can then stress-test their supply chains and investment decisions, and evaluate changes to their strategy that would help diversify their exposure to disruptive events within and across countries.  

Businesses should also ask themselves whether they are doing enough to protect and manage their reputation, which is even more vital in the current environment. Firms need to keep their finger on the pulse of both internal and external sources of instability so that emerging issues can be addressed rapidly and constructively before they cause lasting damage. Becoming more attuned to social and political conversations will also help leaders assess where they might deepen engagement—with customers, employees and policymakers—to help mitigate potential threats in advance.  

Staying power in difficult times is critical and companies that are adept in building the skills to manage through a global context of continuous stress and unrest will be better placed to grab market share from competitors that address the same challenges less successfully.

John Drzik is president, global risk and specialties for Marsh.

A longer version of this article will appear in an upcoming edition of AFP Exchange.
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