Managing business risk has always been a strategic imperative, but perhaps never more so than today. Explosive global expansion, ever-more-onerous regulatory oversight and an environment of rapid change have spurred a growing awareness about the importance of understanding-and preparing for-potential threats to an organization’s competitive position.
For many companies, identifying and mitigating enterprise risk is a critical element of managerial strategy. At Procter & Gamble, for example, responsibility for management of strategic risks has been shifting to the company’s global leadership council, CEO A.G. Lafley’s leadership team. Those top execs then work with a sub-team of professional risk managers to mitigate risks. What’s more, one of the six board meetings the consumer product behemoth holds each year focuses entirely on risk management.
“The buck stops with me and, in the end, with our board of directors,” Lafley told CEOs gathered for a roundtable discussion cosponsored by Ernst & Young and Chief Executive Magazine. “So we focus on strategy-and leadership development, management succession and risk management are three things we try to do at the board level.”
The growing emphasis on risk management in the upper echelons of corporations is due in part to the power that the Internet has bestowed upon the average citizen. Disgruntled customers flame companies for disappointing service; amateur comics record elaborately staged prank requests to call centers and post them online. In short, a single misstep can result in an Internet missive that spreads across the globe. “Between blogs and YouTube, we live in an environment where the perception of your company can change radically in five minutes, whether it’s because of a product failure or other event,” said Howard Brodsky, CEO of CCA Global Partners, who agreed that managing a company’s reputation-and therefore all the risks that affect it-ultimately falls to the CEO.
CEOs are not alone in giving greater weight to potential crises when making strategic decisions. A growing number of investors consider a company’s risk management capabilities when weighing their investment decisions, reported Inge Boets, a partner in Ernst & Young’s business risk services division. “Sixty-nine percent of investors we surveyed in a 2006 study claimed that transparency, and particularly transparency about the risk profile and risk management process, was one of the key decision factors in their investment decisions,” Boets noted.
Those threats come in a wide array of forms, from the consolidation that is sweeping many industries as companies strive to build scale, to regulatory intervention that can adversely impact companies across industries or take a toll on a specific industry. While individual companies often give greater or less weight to the various categories of risks, most CEOs participating in the discussion had many concerns in common. For example, several concurred with a study on the top strategic risks facing corporations currently being finalized by Ernst & Young (see sidebar, p. 52). Regulatory and compliance risks, global financial shocks, aging consumers and workforce and emerging markets were leading the working list as the top four current concerns at press time.
“We are the most highly regulated industry in the world, and we have the most compliance issues in the world,” noted Steve Creamer, president and CEO of EnergySolutions. “So those are risks, but our single biggest issue is human capital. We are losing it really fast, and that’s really scary.” The U.S. government has compounded the problem by limiting the H-1B visas that allow foreign-born graduates of U.S. schools to join the American work force. And the solution du jour of sending work overseas is only a stopgap measure, noted other business leaders. “We have an aging population in the U.S.,” agreed Andrew Appel, CEO of Aon Consulting Worldwide. “Then there’s a huge shortage of management talent in China, and the same issue in India. You’re starting to see wage inflation there. Europe is having succession problems. So the talent issue is going to manifest itself globally, and then we’ll be managing a global organization in a world of scarce talent.”
Further diminishing the pool of talent is the fact that more and more students are steering clear of fields like engineering and science in favor of high-paying careers in investment banking and law. “I don’t need that many more lawyers,” noted William Kroll, chairman and CEO of Matheson Tri-Gas. “God knows I’ve got enough of them. And I don’t need any more accountants. I could use a few more good scientists. I could use some good engineers. Without [more graduates] in science and engineering, not only will you not have people to run your businesses, but we won’t be able to come up with the killer applications and products that will grow the overall economy.” Competing in what is increasingly a global economy is a major concern for CEOs. Several tied the global issue to the U.S.‘s stringent regulatory requirements, noting that a more restrictive environment puts U.S. companies at a disadvantage when competing with their foreign-based peers.
At the same time, difficulty protecting intellectual property in developing nations makes manufacturing overseas problematic, particularly for technology firms. And then there’s the issue of a growing anti-American sentiment- one increasingly directed at U.S. brands.
“A lot of great global brands, including CNN, Ford and even Microsoft-have taken a real hit,” noted Jeffrey Sonnenfeld, chairman and CEO of the Yale School of Management Chief Executive Leadership Institute. “Surveys suggest that one out of five consumers will avoid a brand attached to this country. That isn’t happening anywhere else-no matter how ï¿½ï¿½evil’ another country might be viewed. We’re the only country in the world with that issue.”
Ironically, some of the most pressing concerns for corporations are also their most promising opportunities. Rapidly developing global markets, for example, represent the strongest growth potential for companies that have already mined established markets. But even as CEOs express enthusiasm for the market potential of the rapidly developing middle class in many emerging markets, they note that those opportunities come hand-in-hand with some degree of peril.
“We have a much more diversified emerging market portfolio-$24 billion in exposure,” noted Lafley. “Our view is that even though there’s a fair amount of political excitement in emerging markets around the world, economically and financially they’re more stable today than they were a while ago. But they’re still more volatile than developed markets.”
It’s a Green, Green World
In a similar fashion, growing ardor for all things green, a top 10 enterprise risk dubbed “Radical Greening” by Ernst & Young, also represents an opportunity, pointed out Edward Voboril, board chairman of Great-batch. “Why don’t we just marshal the technology and position ourselves as a country to be the best at developing alternative energy sources and take leadership in green technologies rather than reacting to them?” he asked. “We certainly have the technology and human resources to do that.”
Companies, too, can look to corner a new market with products or services that address the trend toward sustainability. 3M did just that when passage of the Occupational Health and Safety Act rippled through Corporate America, causing a tidal wave of concern about how the cost of complying with its requirements would impact the bottom line.
“One of our young managers came up with the idea that rather than worrying about it happening, why not come up with a line of products that would be used by other companies to help protect their workers from exposure to chemicals and so on,” recounted Moe Nozari, executive vice pre sident, consumer and office business at 3M. “The result is still called the Occupational Health and Safety Products division today, and it’s one of the most profitable divisions. Whenever things like 9/11 or the SARS epidemic happen, that division does a tremendous amount of business.”
Even the possibility of an industry redefining home run is an opportunity if you’re the company behind the batter’s plate, noted Alfred Kahn, chairman and CEO of 4Kids Entertainment, which license and market the overnight sensation Cabbage Patch Kids. The gimmick of each doll in the line being unique took hold with such fervor that parents across the country practically stormed toy stores to pony up for the pricey moppets. “Can you imagine the guy who’s making the traditional baby doll at that point in time?” asked Kahn. “We killed them. So there’s the risk of that-and there’s the opportunity.”
What can companies do to ensure that they end up on the opportunity side of the risk fallout? First and foremost is the necessity of understanding the various forms that risk takes, noted Inge Boets of Ernst & Young, who says that potential threats come in three forms:
- Macro threats, such as a pandemic, that affects all business.
- Sector threats that may not apply to all industry sectors or don’t necessarily apply to all industry sectors in the same way.
- Operational threats considered to have the potential to significantly impact organizations.
“Having a robust risk identification and assessment process is an important first step,” said Boets. “Often, many parts of an organization are looking at risk in different ways, usingdifferent languages. So it’s important to delineate who’s responsible for which risk in your organization.” P&G’s practice of managing risk at the enterprise level is one way of avoiding a major pitfall-the risk of mismanaging risk. “There can be a disconnect between what is on your mind and what’s on the minds of the people who are supposed to be thinking about these issues for you,” pointed out Andrew Appel of Aon Consulting. “You may be thinking about these [big picture] issues and find out that your risk manager is focusing on how to lower the cost of your casualty insurance.”
“We’ve found that two things happen if risk management gets buried in the staff,” added Lafley. “One is that an issue is not on the radar screen until after you have the problem-when the plant blows up or a major consumer product safety issue arises. And two is that in a company like ours-we’re in 20 to 25 different industries, on the ground in 80 countries and have 135,000 people-you just don’t know who to call.”
Avoiding that scenario requires “bundling” risks and monitoring those bundles at the very top of the organization, asserted Lafley. “One of the things we’ve been working harder on is understanding integrated risks because we tend to isolate and manage individual risks,” he said. “We elevate the responsibility and accountability at the industry level to line leadership and to the enterprise level. We also maintain a small cadre within the company on the mastery and expertise side and build that expertise by using external resources. And we also make it a measure of performance. Risk management and internal controls are part of the performance evaluation process for our 130 general managers.”
While companies can never eliminate risks, that organization-wide, integrated approach will go a long way toward ensuring that potential crises are averted whenever possible and handled well when they do arise. But it necessitates defining a process of risk management and communicating the importance of following those practices organization-wide.
Even then the process will break down without a corporate culture that supports that initiative, warned Appel. “When you run a large organization, the only way you’re going to find out the risks and the issues is if you have a culture of transparency,” he pointed out. “That’s hard to do when you have thousands of people spread across hundreds of countries.”
Leigh Abrams is president and CEO of Drew Industries, a manufacturer of components for recreational vehicles and manufactured homes based in White Plains, N.Y.
Andrew Appel is CEO of Chicago, Ill.-based Aon Consulting Worldwide, a global management consulting firm.
Inge Boets is a Belgium-based partner at Ernst & Young, specializing in business risk services.
Howard Brodsky is co-CEO of CCA Global Partners, a cooperative of independent retailers based in Manchester R.I.
Steve Creamer is president and CEO of EnergySolutions, a materials processor based in Salt Lake City, Utah.
Andy Gatto is president and CEO of Russ Berrie and Company, a manufacturer of gift and juvenile products based in Oakland, N.J.
Alfred Kahn is chairman and CEO of 4Kids Entertainment, a provider of children’s entertainment and merchandise licensing based in New York City.
Farooq Kathwari is chairman, president and CEO of Ethan Allen Interiors, a home furnishings manufacturer and retailer based in Danbury, Conn.
Edward M. Kopko is chairman, president and CEO of Ft. Lauderdale, Fla.-based Butler International, a global provider of technical, engineering and technology services, and chairman, CEO and publisher of Chief Executive Group, based in Montvale, N.J.
William J. Kroll is chairman and CEO of Matheson Tri-Gas, a provider of specialty gases based in Basking Ridge, N.J.
A.G. Lafley is chairman and CEO of Procter & Gamble, a consumer products company based in Cincinnati, Ohio.
Moe S. Nozari is executive vice president, consumer and office business at 3M, a global manufacturer of office, construction and home improvement products based in St. Paul, Minn.
Steve Shaw is president and CEO of Volt Information Sciences, a New York City-based telecom.
Jeffrey Sonnenfeld is chairman and CEO of the Yale School of Management Chief Executive Leadership Institute, based in New Haven, Conn.
Edward Voboril is chairman and CEO of Clarence, N.Y.-based Greatbatch, a manufacturer of innovative power sources and precision components.
Ippei Wakahara is president of Optrex America, a liquid crystal display company based in Plymouth, Mich.