Businesses must adapt in increasingly complex world

Businesses must adapt in increasingly complex world

The Global Risks Report 2016 (GRR 2016), an annual study published by the World Economic Forum (WEF) in collaboration with leading institutions such as Zurich Insurance Group, has found that global risks are becoming increasingly interconnected, posing a profound challenge to people, institutions and economies.

About 750 experts and key decision makers from the WEF’s global multi-stakeholder community were asked to rank 20 global risks over a 10-year time horizon according perceived likelihood and potential impact. This year, the failure of climate change mitigation and adaptation was ranked the most impactful risk, ahead of weapons of mass destruction and water crises, while large-scale involuntary migration was seen as the most likely disruptive global risk.

More troubling, however, was the rising awareness of issues that could give rise to systemic risks, such as the potential for climate change to exacerbate water crises giving rise to geopolitical conflicts, and the overall sense that interconnectivity and independence are rising.

Vulnerable

That is bad news for business, which have proven particularly vulnerable to interconnectivity. A recent study of more than 30,000 U.S. public companies over the past 50 years by Boston Consulting Group, found that public companies were six times more likely to delist than they were 40 years ago, with more than one in three expected to do so over the next five years.

“We believe that companies are going out of business quicker because they are failing to adapt to the growing complexity of their environment. Many misread the environment, select the wrong approach to strategy, or fail to support a viable approach with the right behaviors and capabilities,” the report’s authors concluded.

Recognizing the challenges of operating in a rapidly changing world in which events in one part of the world can have unforeseen consequences in another, the GRR 2016 calls on business and governments to work together to build resilience – what the WEF calls the “resilience imperative”. These challenges will only be compounded as the Fourth Industrial Revolution unfolds, introducing an array of new risks which are poorly understood.

Resilience

As the Boston Consulting report notes, “A paradigm shift in managerial thinking is needed. Leaders are used to asking, “How can we win this game?” Today they must also ask, “How can we extend this game?” They must monitor the changing risk environment and align their strategies with the threats they face. Understanding the principles that confer robustness in complex systems can mean the difference between survival and extinction.” A key step towards that is integrating a holistic risk management approach into the company’s business model. Risk management needs to begin at the Board level, because it is the board that sets strategy and is ultimately responsible for ensuring the long term survival of the company.

Such a strategy not only needs to consider the risk landscape within the business, but also how it may affect customers, suppliers, distributors and other key stakeholders. It also needs to win the support of employees and other key stakeholders.

Beyond that, however, companies need to understand that they are part of a complex global ecosystem and understand the consequence of their actions within the wider context of the society in which they operate. As the GRR 2016 notes, “Key to building resilience is the stability of societies.” Businesses have a role to play in promoting social stability through responsible corporate behavior and by working with governments and other stakeholders to find (potentially profitable) solutions to global challenges such as climate change, rapid urbanization, population aging, social alienation through unemployment and under-education, and others. In so doing, companies also build social equity, brand and the right to engage publicly on social issues of concern.

Disclaimer: Views expressed on this page and in the reports are not necessarily those of the Zurich Insurance Group, which accepts no responsibility for them