Should CEOs think differently about risk?: PwC

The world has changed significantly in the last three years. The pandemic has caused disturbances in health, economics and markets, with notable impacts on the labour market and supply chains. The volatile geopolitical environment has further exacerbated supply constraints with rapidly evolving sanctions. Megatrends including climate change, technological disruption, demographic shifts, a fracturing world and social instability are reshaping the business environment.

In New Zealand, the devastating effects of the Auckland floods and Cyclone Gabrielle will almost certainly sharpen the focus of customers, investors and other stakeholders on ESG. These events illustrate the pressing need for businesses to transform their approach to climate risk. Cyber risk, inflation and macroeconomic volatility were also top of mind for New Zealand CEOs in PwC’s 26th Annual Global CEO Survey.

An acceleration in the view of what is possible has seen many organisations make significant changes to their strategy and operations over the last few years, resulting in an impatience to move on opportunities. This is no more so than in the area of digital transformation where PwC’s 2022 Global Risk Survey found that 79% of executives believe keeping up with the speed of digital transformation is a significant risk management challenge for their organisation.

In short, this period is changing how we see risk and opportunity. While any of these quite diverse changes or risks can cause significant impacts alone, it is their degree of interconnectedness that has caused far-reaching implications.

Leading organisations have used this time to enhance their resilience, but also their risk maturity so they are ready today to seize new opportunities for the future with greater confidence. It is clear how valuable risk-informed decisions are, and that risks are no longer something that can be well-handled within organisational silos or a central function. Navigating the risk landscape takes CEO oversight and board-level accountability. To that end, here are four ways many CEOs are changing their thinking about risk.

Require a panoramic view of risks

Strong risk and resilience capabilities provide an edge, allowing an organisation to grow and deliver on their outcomes with confidence by anticipating risk, making risk-informed decisions and cost-effectively mitigating when incidents occur. Leaders should have a handle on all of the moving pieces that contribute to strategic, operational, regulatory, financial and technological risk, the impacts they have across the organisation and how each is being controlled. The Chief Risk Officer is key to curating this, but the entire executive team gets great value from understanding and leveraging it. Data is a key tool in the arsenal to detect changes in the risk landscape and create actionable risk intelligence for them all.

Set risk appetite and develop a strong risk culture

Risk appetite can help leaders and people in an organisation understand where they are able to take more risk in pursuit of the strategy, new opportunities and growth. Setting a risk appetite supports agility, clarity and alignment throughout the organisation and we are now seeing this be done across all sectors, not just in financial services. It is also a key mechanism to remind everyone of the need for care for broader societal considerations as organisations face decisions and risks.

A strong risk culture also plays an important role in leveraging the upside of risks in an agile manner, aligned to the organisation's purpose and values. More sophisticated techniques are now being used to understand the impact of organisation culture on risk and compliance (and vice versa), and to optimise these.

Anticipate risk using data

In a world changing so quickly, one can’t always anticipate future risk by studying the past. Too often risk management relies primarily on wisdom, judgement, past experience and long-held techniques to look at likely risks and consequences. Far less often is the organisation and risk function using significant data to look forward, identify patterns and detect warning signals of new threats across the risk spectrum, and to analyse the potential for and impact of risks.

We are seeing more and more leaders are positioning to anticipate risks and to see changes in them in real time, leveraging internal and external data and new risk technologies to monitor and anticipate risk, and to analyse it more carefully. Real-time data is now used in many aspects of business. Digital marketing responds to consumer data to plan the next best action. And, while self-driving cars may appear magical, they are not - they operate on sensors and real-time data to guide their next move. While applied differently, these techniques and tools can be adopted to anticipate risk and respond with agility. It’s time for risk functions to transform to enable this and in our Global Risk Study, 72% of organisations plan to increase spending on technology to support the detection and monitoring of risks.

Engage a diverse community of solvers

It takes diverse perspectives working together to seize opportunities in a risk aware way, and to predict and manage risks. Risk is a team sport. For example, a key component of successful risk management is understanding psychology and human-centred design, yet these are not skills typically found in risk and compliance functions. Such skills have been used in sales, safety, and other functions to motivate and incentivise people to do, or not do, certain things and to design systems and processes accordingly.

Our Global Risk Survey showed organisations are moving in the right direction with 70% now prioritising diversity in risk teams, making use of alliances to bring diverse expertise and technology to the organisation and enhancing the risk awareness of operational areas more broadly.

In summary, managing risk isn't about responding to change. It's about changing the way we see, shifting our perspective and considering different angles to anticipate and be agile. When we look in new ways, we unlock new possibilities. At PwC we’re helping our clients change the way they see risk.