Economic uncertainties are raising risk profiles globally

12 May 2016 4 min. read

Global political and economic uncertainties are putting company executives on edge as they seek to address a range of risks, a new report finds. The top ten risks with the highest impact for 2016 include regulatory changes, economic conditions and organisational structures that are unprepared for cyber-attacks. The report highlights that while regulatory change risks are decreasing, unexpected and rapid changes to the economic environment are creating considerable uncertainties for businesses.

The global economy continues to face volatility in the face of ups and downs in the equity markets, a plummeted oil price, 2016 election polarisation in the US, the prospect of Brexit in the UK, US Federal Reserve interest rate rise prospects, and developed world income and wealth inequality. At the same time, a bumpy landing in China as well as a health and productivity crisis, plus concern over data breaches are putting many companies on edge.

To find out what is of the most concern to top brass in business, Protiviti and ERM Initiative (a unit of North Carolina State University) annually conduct research into global risks facing business. The latest report, titled ‘Executive Perspective on Top Risks for 2016’, explores the risks that board members and executives from global corporations see before them for the coming year. The survey for the report involves 535 respondents, of which 250 respondents are based in the US. The survey asked respondents to rate 27 individual risk issues using a 10-point scale, where a score of 4.49 or lower are classified as having a “Less Significant Impact” over the next 12 months and a score of 6.0 or higher are classified as having a “Significant Impact” over the next 12 months.

Top ten risks
The survey found that a number of areas continue to be perceived as generating considerable risk to corporates involved in the study. The top contender, at just over 6.0, is regulatory change that affects the delivery of products or services. The current economic conditions came in second, with an impact score of almost six, while the risk and management of cyber threats that disrupt core business was ranked third, at around 5.6. The report highlights, however, that larger corporations tend to place considerably higher impact scores to the top three, all of which are above six.

The lowest rated risks in the top 10 are sustaining customer loyalty and retention, with an impact score of 5.2, insufficient organisational culture with little encouragement for risk identification, at 5.3, and anticipating that volatility in the global markets and currencies may create organisational challenges, at 5.4.

Patrick Scott, Executive Vice President at Protiviti, remarks: “The results of our latest survey show that key stakeholders’ expectations regarding the need for greater transparency about the nature and magnitude of organisations’ risks continue to be high.”

The ups and downs
The report also considered the most significant changes in risks observed between 2015 and this year’s report. The highest increase in perceived risk is uncertainty surrounding the viability of key suppliers or scarcity of supply on the delivery of products and services, up 0.9 points, from 3.64 to 4.54. The second biggest mover is the procurement of affordable insurance, up 0.85 from 3.24 to 4.09. Anticipating changes in global trade policies comes next, up 0.71 from 3.74 to 4.45. 

A number of risks also saw decreases since the previous year’s rating. Regulatory changes and scrutiny fell -0.29 from the previous year’s score of 6.35. Uncertainty within the area of political leadership nationally and internationally on growth opportunities saw a -0.15 decrease, from 5.15 to 5.0. Existing operations being outperformed by competitors saw an -0.07 change, dropping to 5.10.

According to the authors, “most of the risks with the largest increase in 2016 from 2015 are linked to overall concerns about geopolitical, global economic and various operational risks.” Jim DeLoach, a Managing Director with Protiviti, adds that “Pressures from boards, volatile markets, intense competition, demanding regulatory requirements, new technologies and other dynamic forces are leading to increasing calls for management to design and implement effective risk management capabilities to identify and assess organisations’ key risk exposures, with the goal of reducing them to an acceptable level.”