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Risk management: global risks

Global risks are today's risks. They are an integral part of a world characterised by ever greater complexity and accelerating change, and they are becoming more relevant and pervasive than ever.

Businesses cope well with those kinds of "familiar" business risks traditionally within the canvas of the firm (eg, project risks, competitive risks, industry risks, currency risks), but often find themselves far less well equipped to deal with a set of new, less familiar, potentially more dangerous, global risks.

A global risk is defined by its global character and its potential to impact, often simultaneously, many different groups or industries in different countries and regions. Risks are by nature idiosyncratic – their definition depends on who you are – but it is safe to say that risks as different as terrorism, emerging fiscal crises, disruptions in oil supplies, climate change, Islamic radicalism, pandemics or a sudden decline in a major country's growth all qualify as global risks. When it unfolds, a global risk has far-reaching consequences for our global society and global economy.

From the standpoint of a family-owned business, a global risk is quintessentially a non-business risk, which has nonetheless the potential to impact decisively on the family business, wealth preservation and creation. In our increasingly interdependent world, global risks often make the headlines: terrorism, failed and failing states, the utilisation of the internet to launch cyber-attacks, natural disasters, tsunamis and tropical cyclones possibly caused by climate change: all these currently dominate our perception of the risk landscape.

Others have not yet penetrated public consciousness, but can have a devastating impact on particular groups of individuals or industries. The risk of identity theft, for example, can have dramatic implications for financial services, the sanctity of contract and inter-personal trust, and all critical ingredients of the success of a family-owned business. In today's world, nobody can hide from a global risk.

Global risks are a determining feature of today's highly interdependent world. All elements of the global system are so highly and intrinsically intertwined that the occurrence of any particular global risk is almost sure to have a cascading effect, that is: to entail the occurrence of another global risk.

Consider the following example: Hurricane Katrina struck New Orleans, Louisiana as a Category 4 storm on 29 August 2005. Costal storms are common, but this one was the costliest natural disaster in the history of the US, inflicting total damage estimated at $100 billion.

However, perhaps more significant (and shocking) was the collateral damage inflicted by Hurricane Katrina beyond its immediate physical impact; the sequence of events – the domino effect – that the natural disaster put into motion.

Katrina had an impact on the Bush presidency, already weakened by difficulties in Iraq, on race relations in the US, on global oil prices and on the assessment of US power and capacity in many parts of the world.

The same observation about the unforeseeable permutations that the occurrence of a global risk may cause also applies to the terrorist attacks of 11 September 2001 and many others. In a world characterised by uncertainty, complexity, volatility, turbulence, asymmetry and time compression, global risks increasingly matter and matter more.

As verified by the current financial debacle, global risks travel fast and have the annoying habit of reproducing themselves unexpectedly and in the most improbable places. They have also a tendency to provoke "tipping points", with which they share three main characteristics:
- Contagiousness – like ideas and products, in today's
globalised world, global risks spread like epidemics.
- Relatively minor causes can have major effects – see the "small" subprime crisis turning into a full blown financial crisis of major proportions.
- Changes tend to happen dramatically rather than
gradually.

Global risks have the particularity that they cannot be predicted – a similarity they share with "black swans" (very low probability, very high impact kinds of events). However, even if one cannot predict the future, one can prepare for it.

When dealing with global risks, like any kind of risk, it is important to remember that a risk always represents both a threat and an opportunity. In most minds, a risk is often associated with the fear of a loss, but it does not have to be that way.

All family businesses exist because at one stage, a family member made a calculated risk, shaped it to his or her advantage and succeeded in capturing the upside of the risk, transforming it in a financial reward.

Why is it that a few succeed while the majority fails? In the end, it is very much a question of character. In the words of Churchill: "An optimist sees an opportunity in every danger, while a pessimist sees a danger in every opportunity". Global risks are no different.

Take climate change. The science behind it is now incontrovertible. It is happening and no one can reasonably deny it (even though some people may question the extent to which the phenomenon is man-made). In that respect, and to go back to the distinction made above, climate change is a trend: the likelihood that it is happening is indeed 100%. The global risks embedded in climate change, however, are numerous, and so are the opportunities.

Firstly, global warming is in reality good news for (limited) parts of the world and very bad news for the rest. The perspective of a resident in Canada or Siberia will contrast sharply to that of his counterpart from Bangladesh or the Maldives. In one case, climate change will make your like easier and will offer new opportunities (in mining or shipping for example), while in the other it is likely to threaten your very existence.

Secondly, global warming amplifies current threats and creates new ones. A majority of scientists attribute the severity of some recent hurricanes like Katrina to warming sea temperatures caused by climate change. But again, there are many great opportunities associated to the mitigation of the risk: green investment, new materials susceptible to make infrastructure more resilient, weather derivatives (which have become an attractive asset class because it is uncorrelated with most other assets) and so on.

The same principle applies to the internet, whose transformative power is changing society. The internet can be used (and is used) for evil purposes, to invade for example the privacy of a private investor, but it is at the same time changing the way we learn, we communicate within our own family, do artwork, express ourselves, chose and buy products. As we "reset" a computer, the internet is resetting society, and putting societies from emerging markets on an equal footing with the old western societies, giving all an equal chance in the world of tomorrow.

The thread that transcends all these global risks and makes us understand how one might be hit by them or how one might profit from them is quite obvious: only those individuals and families who are conscious of their significance can successfully mitigate them.

Making your business prepared for global risks is critical as only those leaders who comprehend and master the context in which they operate, grasps the trends, and thus better understands the risks, will be optimally positioned to act and react promptly and pertinently to them.

As with the current financial crisis, those most likely to emerge on top will have shown themselves able to act swiftly and decisively. Over the next seven pages we will examine how you can best prepare your businesses to manage risk effectively.

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