Many organizations’ risk management practices are worryingly incomplete and being outpaced by an era of catastrophic “black swan” events, said a new paper by UK-based assurance, tax and advisory service provider PwC.
Businesses need to be more agile and innovative if they are to combat catastrophic, major-impact black swan events such as terrorist attacks, tsunamis or major oil spills, by updating and innovating archaic practices to achieve wider risk resilience, suggests the paper entitled “Black Swans Turn Grey: The Transformation of Risk.”
“The risk landscape is changing, and established risk management approaches need to be updated to keep pace. Many organisations currently have the wrong focus. They major on financial and operational risks and crucially regard risk and strategy as separate, rather than seeing risk-taking as a key source of value creation. But the world where risk events could be predicted—and their impacts controlled—is fast disappearing,” said Richard Sykes, PwC governance, risk and compliance leader.
“By their nature, black swan events should only occur at unpredictable intervals. Yet recent experience suggests events that fit this definition are happening more frequently. Rather than being infrequent outlier events, it seems they are now part of a faster-changing and more uncertain world, which makes it hard for businesses to understand where new risks are going to come from,” he added.
The paper suggests that enterprise risk management (ERM), the practice currently used by most major corporations, encourage a box-ticking, process-led approach that could lead front-line staff to see risk as separate from their own business decisions. “Large organizations now have blind spots from which high-impact risks can emerge to damage or even destroy their business.”
Comprehensive risk management practice, on the other hand, helps enhance resilience and provide a clear view of the board’s attitude to integrity, risk and safety.
“By understanding today’s risk landscape, organisations can progress from managing specific risks to achieving wider resilience. What is needed is a new, more flexible and holistic approach to risk management that develops a risk aware culture. There’s growing evidence that businesses that are seen to truly embed a risk-aware culture and behaviours are valued more highly by the markets,” said PwC risk partner Armoghan Mohammed.
Photo from PwC
