Managing Emerging Risks

A new report from Lloyd’s and the Economist Intelligence Unit titled Directors in the Dock: Is Business Facing a Liability Crisis? reveals that boards could make better use of the time they spend on liability and litigation issues by switching their focus to emerging risks. Many executives interviewed for the report admit that there has not yet been board-level discussion on a range of emerging threats, even though they recognize the need to tackle the issue. For example, nearly four in 10 said that they should discuss work-related stress, but have not yet raised this issue formally, while 29 percent believe technology security should be discussed. Indeed, technology risks – such as data and system security and nanotechnology – are among the top three emerging risks that executives are most concerned about. Environmental liabilities and the liabilities arising from poor corporate governance are also top board concerns. Check out further I.I.I. info on the U.S. liability system.  

One thought on “Managing Emerging Risks”

  1. I have done a lot of research in emergent risk, and am glad to have the chance to post to this topic.

    In short, certain developments that made globalization possible have caused new risks to emerge. And more often than not, we lack both the understanding and tools to deal with them.

    I agree with the thesis that Boards would be better served by focusing on emergent risks, but precisely because they:
    • tend to/may appear abruptly, as surprises…and catch us off-guard

    • may pose an existential threat to the corporation (or at the very least threaten to significantly diminish its brand and/or market capitalization), and

    • increase the liability exposure to Boards and their members.

    The key strategic question is: “is it better for us to tackle it, or wait for it to tackle us?” Be proactive or reactive? Traditional ERM and insurance risk assessment and management is ill-prepared to deal with emergent risks which are characterized by a high degree of uncertainty. The risk culture, both within the corporation and most certainly within the ranks of ERM consultants, focuses on what are (relatively) well defined risks that come complete with historic data, exhibit a high degree of stability, behave in a linear manner, and can be contextualized in a predict-then-act model. None of which are traits of emergent risk.

    Now not all emergent risks will put you out of business; but there are a growing number that do pose existential threat. Boards must focus on these risks precisely because they are laden with liability issues of the first class, and because exposure and consequential damages have substantially increased.

    For example, the lack of transparency in global supply networks combined with upstream trading partner disintermediation are both emergent and material, i.e. when things go bad, they go bad in a big way! A cursory look at the effects of supply chain contamination on market capitalization of effected companies quickly makes the point. The liability issue is further demonstrated by Mattel and 18 other defendants now being sued by the California Attorney General and the Los Angeles City Attorney accusing them of making or selling products that contain” unlawful quantities of lead” under California’s Proposition 65 law.

    The Congress has also introduced multiple consumer protection laws that ratchet up penalties (going from a $10 million to $100 million cap per incident), provide significant financial incentives to “whistle blowers” (up to 20% of damages), and put individual Board members squarely in the proverbial cross-hairs.

    All things considered, emergent risk (especially the fat tailed variety) is on the rise and more deadly than ever.

    John Marke

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