Hyped-up, high-profile risks can distract from more serious but mundane threats to business
Social media and the 24-hour news cycle are putting businesses at risk as hype-up threats distracts from more genuine ones. Business risk assessment and management are being influenced by ‘black swans’ – attention-grabbing issues that are hard to predict – while ‘grey rhinos’, the highly obvious risks, are being downplayed or ignored.
A surprisingly high proportion of companies are influenced by hype, mirroring the complacency surrounding existing risks. The two industries most regularly affected by ‘hype cycles’ are the oil and gas sector and the real estate and construction sector. The influence of hype is unsurprising, given today’s information overload and the difficulty of modelling every eventuality. These are some of the findings from BDO’s Global Risk Landscape 2019 Report, which surveyed 500 senior executives and senior risk experts globally, across all major industries.
Previous such BDO reports on the global risk landscape have explored how risk has moved far beyond traditional concerns such as fire and flood, to encompass more fluid concepts such as reputation and data protection. Faced with such a diverse range of intangible risks, how can organisations prevent themselves falling victim to hype cycles that have been triggered into action as a result of outside influences?
More than three-quarters (76%) of business leaders surveyed for the report believe their company is regularly or on occasion swayed by hype. Some 74% of respondents believe that ‘grey rhino’ (obvious) risks are being neglected by the board in favour of attention-grabbing but less real ‘black swan’ risks.
One danger is that a collection of grey rhinos can easily turn into a black swan. Michele Wucker, the American author and analyst who coined the term ‘grey rhino’, outlines the concept in behavioural terms. “It is a very human tendency to not want to admit just how vulnerable we are. Often when we don’t feel we have any control over a situation; we pretend something isn’t that much of a big deal.” A black swan risk, on the other hand, is a random and unexpected event; by its very nature it is unforeseen – but you can still prepare for it.
Grey rhino risks are sometimes neglected because people don’t have the confidence to tackle them –but then the threat may charge and trample them. Some businesses are unsure what to do because no one has dug in to find the appropriate response. Others, with a more entrepreneurial mindset, will even see the risk as an opportunity instead.
Threats that sit on a risk register for long periods are in danger of being ignored, simply through risk fatigue. It is natural, perhaps, to downplay a risk that fails to materialise. This is particularly true for the real estate sector, where investment decisions are typically taken over a relatively long cycle that may not resonate with the shorter horizons of occupiers. As a result, regular warnings over a long period about pivotal shifts in consumer buying habits, especially when wrapped in the context of a prolonged economic recession, may be ignored when developers plan their next retail development.
Opening a conversation about risk is a little like stepping into a maze, with multiple paths for the conversation to take. After all, there is risk in everything an organisation can do, and you don’t want the conversation to be led by fear. But conversely, too little discussion is probably the best way to fall prey to hype – not to mention the risk of falling foul of regulators or shareholders, both of which groups are increasingly interested in ensuring the board has made a proper assessment of risk. So how can you facilitate a sensible dialogue and improve your risk communication?
A first step is to acknowledge the time pressures on the company’s leadership. Members of the board often have to absorb a lot of information in a short space of time and, given the misunderstandings around risk as a strategic tool, may see it as simply one item too many on a busy agenda. Risk officers need first-class communication skills to present the information as clearly as possible, summarised down to the key points – albeit with all the facts and data close at hand. But conveying the information well requires more than just handing over the statistics. One way of catching a board’s attention is to flip the presentation from negative to positive, presenting every risk as an opportunity too. This is a good way of moving on from the quantitative, dashboard type of report into a wider, more qualitative discussion.
A final step is to ensure a proactive commitment to risk management, so that it becomes a core part of the way the business operates. Drafting a risk appetite statement should be less a job for the risk officer than one for the chief executive. Several businesses are already embarking on this journey to make risk management an engrained part of the organisational DNA. This requires a two-way dialogue between board and management. Good communication needs an awareness on both sides that what you hear is not necessarily what the other person meant. Does the phrase “we don’t like surprises” mean “tell me if there are any problems” or “don’t tell me if there are any problems”? That depends not only on the person speaking but also on the culture within the company; building a resilient culture means learning to welcome challenge and shared-ownership when it comes to risk. Increasing diversity can also help in avoiding the pressure of hype. If decision-making is concentrated in the hands of a group of individuals who all read the same media, it will be harder to distinguish between hype and reality.
This year’s BDO survey indicates that concerns have narrowed from the general to the more specific. Regulatory risk is no longer in the top three, while damage to reputation now heads the list. Computer crime such as hacking or malicious viruses comes in at number two. Broader macroeconomic developments meanwhile have been replaced by more granular economic slowdown at number three.
So, how can organisations address these issues and avoid being panicked into a response? To prevent senior executives getting confused about risk, proper training in risk management is required. Companies must look again at their strategies and ask how well they plan for resilience. To prevent and diffuse risk, boards need increased awareness around black swans and grey rhinos. Businesses need to pay enough attention to the big, obvious problems that are right in front of them, which are actually avoidable. By keeping vigilant and regularly undertaking a reality check, they can keep one step ahead. In today’s fast-paced, always-on world, that’s the new skill all businesses must learn.
