2011-05-20
By Bill Baue & Marcy Murninghan

For companies committed to responsible competitiveness, operating environments around the globe are growing increasingly complex, requiring them to redouble their risk management.  Take, for example, how the Arab Spring destabilized the Middle East, or natural disasters in Japan (earthquake and tsunami) and the US (tornados and floods) produced catastrophic consequences inflicting huge financial costs.  In extreme risk climates, capital often flows to safer harbors, but human and environmental impacts linger.

Consequently, risk management for transnational companies has become far more complicated.  In addition to managing and monitoring multiple business processes in different regions affecting upstream supply chains and downstream product usage and disposal, these firms are expected to:

REGULATING RISKS

Regulators are paying closer attention to corporate behavior, weighing whether companies’ license to operate should be restricted. Laws on bribery and corruption – including the Foreign Corrupt Practices Act in the US and the Bribery Act in the UK (which took effect July 1) – put companies on notice that what once was acceptable is now grounds for punishment, exposing companies to reputational harm—as the phone hacking scandal affecting News Corp. has vividly demonstrated.  And as companies scale up through mergers and acquisitions (for example, last year’s acquisition of the UK’s International Power Plc by GDF Suez to create the world’s largest utility), they attract even greater regulatory and government attention. (Due to the scandal, News Corp.’s bid for purchasing British Sky Broadcasting was shot down.)

CLIMATE RISKS

In February 2010, the US Securities and Exchange Commission issued interpretive guidance on climate disclosure, reiterating the materiality of climate risk.   Companies also face more requests for voluntary disclosure, most prominently from the Carbon Disclosure Project (CDP), a coalition of investors with assets of $64 trillion (up from $4.5 trillion in 2002.)  And in a February 2011 report that called climate risk a “megatrend,” Deutsche Bank Climate Change Advisors (DBCCA) mapped climate risks affected investment portfolios across different asset classes in three primary categories: economic risk; technology risk; and policy risk.  

REGIONAL RISKS

Meanwhile, nation states are stepping up through regional agreements. One example: the eight-member Arctic Council, which agreed on May 12 to cooperate and improve the way Arctic countries respond to emergency calls in the region.  Another: efforts of Eurozone finance ministers to contain “financial contagion” posed by Greece and Italy.

SOCIAL MEDIA RISKS

On top of all this, citizen pressures can coalesce in real-time, often catching companies off guard.  In a 24/7 social media world powered by handheld devices, companies are far more exposed to activist watchdogs, whistleblowers, even tricksters.  They’re forced to rely on a reservoir of stakeholder trust and credibility if they are to emerge from “punking” crises stronger and smarter. Company boards and senior executives ignore the new world of materiality and risk management at their peril. Getting this right is a critical part of what “responsible competitiveness” means.

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