The aggregate level of risk to businesses is rising at an unprecedented pace. Cybersecurity challenges threaten businesses and even the stock exchanges where value is traded. Social media’s expanding influence can draw attention to risks, crush reputations and cause investors to flee.
Outbreaks of disease, even if they are local, can harm the world economy because of the interconnectedness of business. Globalisation itself introduces volatility – in supply chains, for example – that businesses did not face when economies were less connected.
That’s the global risk landscape according to Gregory Case (at left), the president and chief executive of global insurance company Aon plc. “Let’s everybody get out their aspirin bottle after the headache I’ve just created,” he told an audience Wednesday at a CGMA event in New York City held in partnership with the London think tank Tomorrow’s Company.
Case explained that there is more opportunity than ever for businesses that understand integrated risk. Along with volatility, globalisation provides increased access to new markets. Along with reputational risk, social media provides an inexpensive way for companies to tell their story to a vast audience.
Attacking the opportunity, Case said, requires understanding and quantifying three specific criteria:
- Operating performance. “What are the three or four things that affect the operating performance of my firm?” Case said. “Do you know them? Have you written them down?”
- Balance sheet performance. “What are the specific areas out there that are going to change the fundamental financial structure of the firm?” Case said.
- Volatility. A CEO who has spent years trying to take costs out of the global supply chain recently told Case that globalisation has increased volatility. “They’ve got more volatility in their supply chain than ever before, because what happens halfway around the world affects volatility,” Case said. “… Volatility is almost as damaging to their [price-to-earnings ratio] as a slowdown in earnings.”
The goal, Case said, is for companies to gain insight into what actions they can take to drive operating performance while maintaining or reducing volatility.
Evaluating those impacts is a key duty for the finance function, Case said.
“The accountants have a vital role in translating … the impact on the financials in those three metrics … operating performance, balance sheet strength, and volatility,” Case said in an interview after the presentation. “The whole role of the accounting profession, the language of finance, is absolutely essential and critical.”
Finance leaders understand and embrace this responsibility. Nearly two-thirds (65%) of more than 1,300 CGMA designation holders taking part in a recent survey said the financial implications of reputational risk are considered always or often in their organisation.
Finding opportunities in a risky environment requires courage and can be aided by pattern recognition through data analytics, Case said. He said Aon spends $250 million a year on data and analytics – money that could go to earnings but instead is invested in data capability.
The goal is to gain vision about patterns and actions that would serve clients and customers better.
Judicious use of data also can be a key to overcoming the myriad risks that businesses face, according to Case. He said customers and clients are hungry for innovation. This creates opportunity amid risk.
“Action requires insight in this world today,” Case said. “Those who have better insight, driven by data and analytics, wind up taking actions that others view as risky but they view as more certain. That’s what you’re going to try to accomplish.”
Thinking on your feet
Developing the talent to enable companies to innovate is another way to overcome risk, and it was a theme of a panel discussion at the event. Case said Aon’s mission is to build individual excellence to facilitate collective greatness.
“The most successful firms in the world … they embrace risk, they embrace the people issues in everything around them,” Case said. “And ultimately they drive better performance, they create stronger companies, and they do it with less volatility than all their competitors around the world.”
Prem Parameswaran, global head of media and telecommunications investment banking for Jefferies, advocates a “trial by fire” approach to help junior associates develop the confidence to mature from computer-driven analyst positions to senior duties that require meeting with clients.
Giving junior employees the duty of interacting with clients on their own – without more veteran colleagues in the meeting – helps the juniors develop confidence in their ability to think on their feet, Parameswaran said during the panel.
Global credit risk analyst Moody’s, meanwhile, encourages employees to have opinions and express them, according to panellist Lisa Westlake, Moody’s senior vice president and chief human resources officer. She said employees who speak out and deliver valuable insight are rewarded. She said this helps employees evolve into respected authorities.
“We want people to say what they think,” Westlake said. “They need to be able to substantiate that with well-reasoned arguments and data.”
Related CGMA Magazine content:
“Anti-Viral Remedies for Reputational Damage”: These days, bad news spreads faster than ever. Management accountants can help companies prepare to inoculate their hard-earned reputations against damage on social media and repair the harm when it occurs. Read the experts’ prescription.
—Ken Tysiac (firstname.lastname@example.org) is a CGMA Magazine senior editor.