The long view Getting new perspective on strategic risk A report from the Economist Intelligence Unit Sponsored by The long view Getting new perspective on strategic risk Contents  About this research Interviewees Executive summary Chapter 1: Bringing the future into focus Chapter 2: A seat for risk at the top table 11 Chapter 3: Roles and responsibilities for risk 16 Conclusion 23 Appendix: Survey results 25 © The Economist Intelligence Unit Limited 2011 The long view Getting new perspective on strategic risk About this research T he long view: Getting new perspective on strategic risk is an Economist Intelligence Unit report that explores how companies manage long-term strategic risks in their business The report is sponsored by ACCA and Willis The Economist Intelligence Unit bears sole responsibility for the content of this report Our editorial team executed the online survey, conducted the interviews and wrote the report The findings and views expressed in this report not necessarily reflect the views of the sponsor Our research for this report drew on two main initiatives: l We conducted an online survey of almost 500 executives from around the world in October 2011 The survey included companies from a wide range of different sectors All respondents have direct responsibility for, or influence over, their firm’s risk management, either as CEO or board-level executive (42%), as chief risk officer or other dedicated risk executive (39%), or as a non-executive director (19%) l To supplement the survey results, the Economist Intelligence Unit conducted a programme of qualitative research that included a series of in-depth interviews with industry experts The author was Rob Mitchell and the editor was Iain Scott We would like to thank all those who were involved in this research  © The Economist Intelligence Unit Limited 2011 The long view Getting new perspective on strategic risk Interviewees l Andrew Blau, president of Global Business Network l Dr Hugh G Courtney, professor of the practice of strategy at the University of Maryland l Michael Denison, research director at Control Risks Group l Steve Fowler, chief executive at the Institute of Risk Management l Javier Gimeno, professor of strategy and Aon Dirk Verbeek chaired professor in international risk and strategic management at INSEAD l Peter Johnson, vice-president of strategic planning at Eli Lilly & Co l Andrew Kakabadse, professor of international management development at Cranfield University l Anne Nobles, chief ethics and compliance officer and senior vice-president of enterprise risk management at Eli Lilly & Co l Richard Pascale, an associate fellow at University of Oxford’s Saïd Business School l Michael Raynor, director at Deloitte Consulting LLP l Roland Rechtsteiner, managing partner of the global risk and trading practice at Oliver Wyman l Martin Reeves, senior partner and managing director at Boston Consulting Group l Harri Spolander, chief risk officer at Fortum l Tiger Tyagarajan, chief executive at Genpact l Freek Vermeulen, associate professor of strategy at London Business School l Chris Worley, senior research scientist at the Center for Effective Organisations at the University of Southern California  © The Economist Intelligence Unit Limited 2011 The long view Getting new perspective on strategic risk Executive summary D uring times of uncertainty and change, current challenges will often take priority over long-term plans With the euro zone crisis still in full swing and with developed markets facing the prospect of a double-dip recession, many business leaders will naturally focus their attention on the immediate future They will seek assurances that their short-term financing needs will be met and will pay careful attention to the quarterly results to detect signs of market deterioration This short-term focus is ingrained in institutional structures and thinking Most chief executives will enjoy an average tenure of around six years, which means there are few incentives to bring long-term problems to the top of the agenda A relentless focus on shareholder value creation has encouraged business leaders to prioritise short-term profits and share price moves over long-term performance Incentive structures have often reinforced this focus by rewarding managers for meeting short-term targets Short-term metrics will always be important indicators of performance, and companies will always need the ability to take decisions quickly and adapt to immediate opportunities and threats But a retreat into the present will reduce a company’s chances of long-term, sustainable success Business leaders must therefore combine their skills of adaptability and addressing immediate challenges with a focus on longer-term risks and opportunities At a time when the world is changing so rapidly, it may seem as though any attempt to think about the future will be doomed to failure In one respect, this is true No one can predict the future and the current pace of change means that it is more difficult than ever to attempt it But by considering how different futures might evolve, and ensuring that their organisation is equipped to deal with a range of outcomes, business leaders will not only be better prepared for the future but will also be more knowledgeable about their current situation This report explores current approaches to long-term strategic planning and risk management Based on a global survey of senior executives with responsibility or influence over their company’s risk management, and a programme of interviews with industry experts and commentators, the report looks at how companies link risk management with strategic planning Key findings from this research include:  © The Economist Intelligence Unit Limited 2011 The long view Getting new perspective on strategic risk Long-term risk management is rising on the agenda for many business leaders Over the past year, almost one-half of companies say that they have made their risk management more forwardlooking At the most senior level of the organisation, discussions about long-term prospects and risks are becoming more frequent Just over one-third of respondents say that their board and senior management has increased the time that they allocate to long-term risk analysis Links between risk management and strategy are strengthening in many organisations More than one-half of respondents say that their risk function plays a formal role in strategy-setting and in evaluating new market investments A similar proportion of respondents believe their organisation is effective at linking risk management with strategy It is an encouraging sign that companies are adopting a more rigorous approach to considering the risks associated with their strategy, and that risk functions are gaining a more influential position within organisations Many companies are using scenario planning, but few embed it into the overall strategy process A large majority of companies are already using scenario planning and other tools to identify and assess long-term risks But few companies are embedding these techniques into their overall strategic decision-making Only 20% of respondents say that scenario planning plays a vital role in helping their company to formulate and adapt strategy in uncertain times Companies also admit that they may need to allocate more time to a longer-term view More than one-half of respondents agree that they should spend more time thinking about the risks they will face ten years from now The time horizons for strategy and risk are often misaligned Some companies are making longterm strategic plans without a proper consideration of the associated risks Asked about the maximum period over which they consider strategic objectives, 58% say that their timeframe is greater than three years But asked about the maximum period over which they consider risks, the proportion with the same time horizon is much smaller, at 44% In other words, strategy discussions are less likely to incorporate an assessment of risk as the time horizon increases A short-term focus among business leaders can prevent a more thorough assessment of long-term risks Asked about the barriers that can prevent their company from taking a longer-term view of its risk exposure, respondents point to an executive management that is more focused on immediate risks as the chief culprit At a time of considerable uncertainty in the external environment, this short-term focus is understandable But boards and senior management must move beyond this myopia and ensure that immediate priorities not crowd out longer-term strategic planning and risk management Risk functions need to more to challenge entrenched views of the future Despite progress towards a more widespread long-term assessment of business risks, there is a danger of complacency Business leaders can often have deeply embedded mental maps of how the future might evolve It is notable, for example, that almost one-half of respondents agree that looking into the future merely tends to confirm what they already know rather than providing them with new information This highlights the importance of a risk function with the stature to question strategic assumptions Twothirds of respondents agree that the risk function needs to more to challenge management’s view about how the future might unfold  © The Economist Intelligence Unit Limited 2011 The long view Getting new perspective on strategic risk Key points n Long-term thinking may be important, but most companies admit that they are not good at it n Many organisations regard long-term risk analysis as a thought exercise rather than as a key input to strategy n Changing business culture and using better tools may help to alter this mindset Chapter 1: Bringing the future into focus “I t is tough to make predictions, especially about the future.” This famous quote, attributed to the Danish physicist Niels Bohr, neatly summarises the challenge facing companies when they try to set long-term plans Despite their best efforts, and despite a plethora of consultants, tools and methodologies that try to convince them otherwise, the future is inherently unknowable So-called “black swan” events, such as the global financial crisis, can quickly unravel even the best-laid plans And in an environment of extreme volatility and uncertainty, many executives will no doubt wonder why they make bets on the future at all Prediction may be impossible but this does not mean that thinking about the future is pointless Indeed, in sectors with long-term investment horizons, such as energy or pharmaceuticals, it is absolutely critical to explore a range of potential future scenarios This vision of the future may not always be right, but it will at least provide some guidance on the range of potential outcomes for a particular investment “If you take your long-term opportunities seriously, then you’d better take the long-term risks seriously as well,” says Michael Raynor, director at Deloitte Consulting Even in sectors with much shorter product life-cycles, such as fast-moving consumer goods, a longterm focus is important Demographic or generational changes can create new dynamics for business, which can have a dramatic impact on long-term prospects Major new threats, such as climate change, pose considerable long-term uncertainty that will ultimately require a response from every business And macroeconomic prospects in emerging markets will have a significant bearing on the success of new market-based investments “If you’re wondering which emerging markets to bet on, you’ve not only got to think about tenyear population trends, but you’ve got to think about ten-year wealth distribution changes too, and if you don’t, you may end up investing in the wrong market,” says Martin Reeves, senior partner and managing director at Boston Consulting Group Javier Gimeno, a professor in international risk and strategic management at INSEAD, the business school, argues that long-term risk management can be fundamental to corporate survival “If you look at why companies fail, it’s usually because of a failure to identify and mitigate long-term risks,” he says “They might miss a change in the market, or a change in technology It takes so long to react to these risks that you need to be able to position yourself well in advance That can only be achieved by  © The Economist Intelligence Unit Limited 2011 The long view Getting new perspective on strategic risk Chart 1: How effective are your company’s risk functions at helping to manage the following? Rate on a scale of to 5, where 1=Very effective and 5=Not at all effective (% respondents) Very effective Not at all effective The pace of external change 37 34 16 The emergence of new and unexpected threats 10 35 36 15 Continuing economic volatility 37 40 13 34 41 13 Increasing business complexity Unpredictable market demand 30 42 17 14 Spotting emerging opportunities 30 42 Dealing with long-term challenges such as climate change 18 35 23 17 long-term risk management.” Long-term thinking may be important, but most companies admit that they are not good at it Less than one-half of the respondents to our survey think that their risk function is effective at managing the pace of external change or the emergence of new and unpredictable threats Only one-quarter say they are good at dealing with long-term challenges, such as climate change (see chart 1) “Long-term risks are the most important ones of all but they are also the ones for which the available tools and solutions are not necessarily optimal,” says Professor Gimeno Andrew Blau, president of Global Business Network, a consultancy, believes that one of the reasons companies struggle with long-term challenges is that they limit their discussions about risk to factors that are unique to their organisation While this helps them to deal with operational risks, it is completely useless at dealing with a major external event, such as the Arab Spring “When regimes started to fall in the Middle East and Africa, there were various multinationals with business in the region who really hadn’t factored this kind of geopolitical risk into their thinking,” he says “They assumed that political structures were stable and that the recent past would be a good guide to the future It’s important to take a broader view of risk, which is informed by perspectives from outside the company, and think through different scenarios about how external risks could interact with internal vulnerabilities in surprising ways.” The key, then, is not to predict the future or become wedded to a particular vision of what it might hold, but to consider a range of different possible outcomes and assess how they might affect the business “It’s important to keep your options open and ensure that you have the flexibility to respond to different scenarios because you cannot guarantee any particular outcome in the world,” says Harri Spolander, chief risk officer at energy company Fortum Many companies recognise that they ought to more to think about the future Just over one-half of the survey respondents agree that their company does not spend enough time thinking about the risks it might face ten years from now (see chart 2) But although companies recognise the importance of long-term risk analysis, it remains a minority pursuit Among the companies surveyed for this report, only around one-quarter say that analysis of risks that may occur more than a decade into the future is a vital part of their strategy process A further 44% conduct this kind of analysis, but mainly as a thought exercise rather than as a key input to strategy (see chart 3)  © The Economist Intelligence Unit Limited 2011 The long view Getting new perspective on strategic risk Chart 2: Please indicate whether you agree with the following statements (% respondents) Strongly agree Slightly agree Neither agree nor disagree Slightly disagree Strongly disagree Agility and flexibility are more important than the ability to plan for the long term 34 39 15 Our company does not spend enough time thinking about the risks it might face ten years from now 21 32 24 14 The relatively short average tenures of most C-level executives mean that there is little incentive for companies to look at risks more than five years into the future 22 34 21 14 20 Looking far into the future tends merely to confirm what we already believe rather than giving us any new information 11 35 25 Investors are not particularly interested in knowing what risks the company will face ten years into the future 17 29 21 22 11 It is better to bring third-party consultants in to help us think about the long-term future because they introduce fresh perspectives 12 32 27 19 10 24 The risk function in our business needs to more to challenge management’s view about how the future might unfold 22 44 Chart 3: What you see as the value of risk analysis that considers events more than one decade into the future? (% respondents) It is a vital part of the strategy process in our business 24 We this, but more as a thought exercise than as part of the strategy process—it is difficult to incorporate it into our strategic planning 44 We not it because we not believe it has value 32 Pressure to think short-term Long-term risk management is inherently challenging As they look further out to the future, companies will be dealing with uncertainty, rather than risk In his 1921 treatise, Risk, Uncertainty and Profit, the economist Frank Knight defined risk as randomness with knowable probabilities, and uncertainty as randomness where the probabilities are unknown “Long-term strategy over periods of more than ten years is much more about uncertainty than risk,” says Freek Vermeulen, associate professor of strategy at London Business School “You really have no clue what the world is going to look like ten years from now so it can be somewhat dangerous to start measuring the probabilities of a future that may well never materialise.” By extending their risk models further into the future, companies must be aware that the data being used to populate them are increasingly unreliable As financial institutions learned during the recent crisis, an over-reliance on models can be dangerous “You’ve got to be careful not to make modelbased decisions without reflecting on the quality of the input and output to that model,” says Roland Rechtsteiner, managing partner of the global risk and trading practice at Oliver Wyman Besides the inherent challenges of long-term risk management, there are good reasons that executives may be reluctant to focus too much energy on the distant future Over the past three years, volatility in financial markets and a highly unpredictable economic environment have made it difficult to anticipate what will happen from week to week, let alone ten years into the future  © The Economist Intelligence Unit Limited 2011 The long view Getting new perspective on strategic risk Chart 4: What, if any, you consider to be the main barriers that prevent your company from taking a longer-term view of its risk exposure? Select up to three (% respondents) Executive management is more focused on immediate risks 41 Pace of business is too fast to make long-term risks worth considering 36 Doubts about its risk value 33 Lack of expertise in long-term risk analysis 31 Investor focus on short-term performance means that management does not spend much time on longer-term issues 20 Lack of available tools 18 Lack of time and resources 17 Incentive structures are geared toward shorter-term issues 16 Relatively short tenure of most senior executives Other, please specify We take a longer-term view of our risk exposure At a time when many companies have been more worried about survival than how they will be positioned a decade from now, it is perhaps inevitable that long-term thinking slips down the priority list Asked about the barriers that prevent their company from taking a longer-term view of its risk exposure, respondents point to a focus on more immediate risks among executive management as the key factor (see chart 4) When companies are confronted by short-term challenges, there is a temptation to turn inwards and fix the problem by increasing efficiency or eliminating redundancy But as Mr Reeves points out, this can blind companies to the real issues “The human reaction when faced with falling returns or volatility is to shorten the time horizon and seek out short-term tactical gains through increased efficiency,” he says “At the very moment when companies need to look ahead, they exactly the opposite.” Almost three-quarters of respondents agree that agility and flexibility are more important than the ability to plan for the long term (see chart 2) But while quick wits are important, these capabilities alone are not sufficient to ensure long-term success “Agility starts with a longer view because if I haven’t thought about the future, then I won’t have a range of ideas on which to draw when the unexpected happens,” says Chris Worley, senior research scientist at the Center for Effective Organisations at the University of Southern California “Instead, I have to make them up in the moment, which means that my decisions will tend to be focused on a very narrow range of options.” More long-standing, institutional barriers can also prevent a longer-term focus Pressure from investors and analysts can encourage companies to focus on quarterly results at the expense of longerterm performance “The fact that a long-term perspective is beneficial to the company is easy to grasp but it’s challenging to implement,” says Dr Hugh G Courtney, professor of the practice of strategy at the University of Maryland “There are lots of day-to-day pressures from the financial markets that make it difficult to stand strong and have the courage to prioritise a longer-term perspective over the short-term issues.”  © The Economist Intelligence Unit Limited 2011 The long view Getting new perspective on strategic risk Conclusion E fforts to build stronger links between risk management and strategy are at a relatively early stage But there are encouraging signs of change Risk management is outgrowing its origins as a tactical, operational discipline and becoming more tightly embedded with the strategy-setting process Business leaders are opening the doors of the boardroom and becoming more willing to be challenged by the chief risk officer Governance changes that enshrine the independence of the risk function are making this process even easier Based on our research into long-term risk, we have identified ten capabilities that companies should develop to ensure that they have a closer alignment between their strategic decisions and risk management: Prediction is impossible, but thinking about the future is still important Companies that set their strategy based on a deterministic view of the future are doomed to fail Instead, the goal of risk management should be to explore multiple potential scenarios and test strategic options against them Business leaders must be willing to challenge their own assumptions about the future Deeply held mental models and a tendency towards groupthink mean that leadership teams will often share assumptions about how the future will unfold As part of the strategy process, business leaders should be willing to have these assumptions challenged Companies must accept that strategies are hypotheses The management writer Henry Mintzberg said that strategies are to companies what blinkers are to horses In an uncertain world, companies must accept that strategies are hypotheses, and test them regularly using robust risk management techniques and dialogue Risk should be fully integrated with the strategy process If risk officers are only brought into the strategy process once the key decisions have been made, it makes it very difficult for them to challenge executive management Instead, risk should be integrated with strategy and be able to provide independent challenge to management assumptions throughout the process Adopt a discovery-based model for strategy development In many companies, strategy is determined on the basis of influence and power Rather than adopt this advocacy-based model, 23 © The Economist Intelligence Unit Limited 2011 The long view Getting new perspective on strategic risk companies should shift to a discovery-based one, in which a process of dialogue and discussion is used to arrive at optimal strategy Discussions about the future need structure Informal discussions about the long-term future will have limited value Instead, companies need to adopt a structured approach, using techniques such as scenario planning and horizon scanning, to explore potential outcomes Risk should be the responsibility of everyone across the business Companies should work hard to overturn perceptions that risk is the responsibility of risk functions By building a broader culture of risk and distributing awareness across the entire organisation, companies stand a much better chance of identifying new and emerging threats at the periphery Boards need to steer senior management towards a longer-term focus As the stewards of the company’s long-term prosperity, non-executive directors should play an active role in preventing executive management from becoming too bogged down in immediate priorities Risk management needs independence to give it stature Chief risk officers should play a vital role in challenging management and applying a risk filter to strategic decisions But if they report to executive management, it is difficult for them to this Companies should therefore ensure that risk officers report directly to the board This will give them the stature and independence they need to challenge executive management Discussions about risk can uncover opportunities as well as threats Risk and opportunity are two sides of the same coin By integrating risk with strategic planning, companies can identify new opportunities, as well as threats, and find new ways of doing business that can give them long-term competitive advantage 24 © The Economist Intelligence Unit Limited 2011 Appendix Survey results The long view Getting new perspective on strategic risk Appendix: Survey results Do you have responsibility for, or influence over, strategic decisions on risk management in your company? (% respondents) Yes, as CEO or other board-level executive 42 Yes, as a dedicated risk executive below board-level 36 Yes, as non-executive director 19 Yes, as CRO When formulating long-term plans for your business, what is the maximum time horizon over which you consider strategic objectives or risks? (% respondents) Strategic objectives Risks One year 20 Up to three years 33 36 Up to five years 25 Up to ten years 11 14 Up to 20 years More than 20 years 25 © The Economist Intelligence Unit Limited 2011 37 Appendix Survey results The long view Getting new perspective on strategic risk For the timeframe you selected in the previous question, which of the following issues you currently take into account in considering strategic objectives and risks? Select all that apply (% respondents) Strategic objectives Risks Business growth prospects 86 55 Customer demand 74 53 Macroeconomic outlook 67 70 Financing availability 54 58 Fiscal outlook 47 53 Political outlook 46 61 Demographic outlook 32 45 Resource availability (eg water, oil) 25 32 Climate change 17 26 Other, please specify 7 What you see as the value of risk analysis that considers events more than one decade into the future? (% respondents) 26 It is a vital part of the strategy process in our business 24 We this, but more as a thought exercise than as part of the strategy process—it is difficult to incorporate it into our strategic planning 44 We not it because we not believe it has value 32 © The Economist Intelligence Unit Limited 2011 Appendix Survey results The long view Getting new perspective on strategic risk Which of the following tools does your company use or intend to use to identify and assess long-term risks? Please select one for each row (% respondents) Currently use Intend to use Do not intend to use Scenario planning 72 19 10 Third-party forecasts 60 19 22 Risk mapping 51 31 18 Horizon scanning 43 29 29 Other, please specify 22 14 63 Which of the following statements best describes your company’s approach to using scenario planning? (% respondents) It is a useful input to helping us formulate and adapt our strategy in uncertain times 46 It plays a vital role in helping us formulate and adapt our strategy in uncertain times 20 It is an interesting thought exercise but does not have a major bearing on our strategy process 18 It helps us to assess the robustness of our business model and strategy over the longer term It helps us better anticipate the unexpected We not think that scenario planning has any real relevance to our business What, if any, you consider to be the main barriers that prevent your company from taking a longer-term view of its risk exposure? Select up to three (% respondents) Executive management is more focused on immediate risks 41 Pace of business is too fast to make long-term risks worth considering 36 Doubts about its risk value 33 Lack of expertise in long-term risk analysis 31 Investor focus on short-term performance means that management does not spend much time on longer-term issues 20 Lack of available tools 18 Lack of time and resources 17 Incentive structures are geared toward shorter-term issues 16 Relatively short tenure of most senior executives Other, please specify We take a longer-term view of our risk exposure 27 © The Economist Intelligence Unit Limited 2011 Appendix Survey results The long view Getting new perspective on strategic risk Who in your company is responsible for exploring the potential impact of long-term risks on corporate strategy? Please select one only (% respondents) Chief executive officer 30 Executive board 19 Chief risk officer Board-level risk committee Chief financial officer Strategy department Heads of business units Cross-functional committee below board level No one has overall responsibility Non-executive board We not conduct long-term risk management Don’t know How would you rate the quality of managerial engagement between the risk function and the following individuals or groups when considering long-term risk issues? Rate on a scale of to 5, where 1=Very high and 5=Very low (% respondents) Very high Very low Not applicable Chief executive officer 44 30 18 Chief financial officer 31 36 19 71 Other executive board members 12 33 31 12 Non-executive board 25 29 20 15 Head of business units 10 30 31 15 Other business managers 28 18 32 22 122 © The Economist Intelligence Unit Limited 2011 13 Appendix Survey results The long view Getting new perspective on strategic risk How would you describe the contribution of risk management to meeting your organisational priorities in the coming year, versus the past year? (% respondents) Risk management will play a bigger role than a year ago 55 Risk management will play a smaller role than a year ago Risk management will play the same role as a year ago 38 Don’t know In which of the following activities does your organisation's risk function play a role? Please select all that apply (% respondents) Formally Informally Setting overall corporate strategy 58 38 Providing analysis to support corporate strategy 57 31 Evaluating new market investments 53 32 Evaluating M&A opportunities 43 31 Evaluating new geographical investments 41 33 Business restructuring 41 32 Capital raising 37 31 Performance management 34 40 Recruitment of senior executives 18 29 48 © The Economist Intelligence Unit Limited 2011 Appendix Survey results The long view Getting new perspective on strategic risk What, in your opinion, are the most important objectives of the risk management function? Please select no more than three objectives (% respondents) Identifying new and emerging risks 59 Ensuring corporate survival 38 Enabling managers to make better business decisions 31 Minimising losses 29 Communicating key risks to stakeholders 25 Measuring and monitoring risk 25 Ensuring regulatory compliance 22 Enabling more efficient resource allocation 17 Instilling risk culture in the organisation 16 Setting and monitoring the organisation’s risk tolerance 13 Other, please specify How would you rate the effectiveness of your organisation at the following activities? Rate on a scale of to 5, where 1=Highly effective and 5=Not at all effective (% respondents) Highly effective Not at all effective Linking risk management with corporate strategy 16 40 32 10 Ensuring that risk information is timely and up-to-date 10 39 34 15 Ensuring quality and availability of data 36 40 14 Instilling awareness of risk throughout the organisation 11 32 37 17 Communicating risk information to investors 12 31 35 16 Managing regulatory compliance 19 40 29 Anticipating and measuring emerging risks 35 41 15 Recruiting and retaining appropriate risk expertise 24 37 25 Ensuring board level awareness of key risk issues 15 30 42 29 11 © The Economist Intelligence Unit Limited 2011 Appendix Survey results The long view Getting new perspective on strategic risk Over the past year, what changes have you made to the following aspects of your risk management practices? (% respondents) Increase No change Decrease Extent to which risk management is forward-looking 49 50 Time horizon over which we consider risks 27 67 Resources allocated to risk analytics 29 67 Resources allocated to risk modelling 22 73 Board and senior management time allocated to long-term risk analysis 37 59 67 Investment in scenario planning and other long-term risk management tools 29 Formal links between risk management functions and overall corporate strategy 33 64 How important a role does risk management play in helping your organisation achieve the following objectives? Rate on a scale of to 5, where 1=Very important and 5=Not at all important (% respondents) Very important Not at all important Short-term growth targets 24 32 26 12 Long-term growth targets 26 38 24 26 Profitability 24 37 Competitive advantage 21 40 24 10 Long-term shareholder value 20 36 26 11 Reduced cost of capital 12 30 32 18 10 Improved reputation among external stakeholders 17 35 30 Reduction in losses or risk events 31 40 21 How would you rate the effectiveness of your organisation at the following aspects of risk management? Rate on a scale of to 5, where 1=Very effective and 5=Not at all effective (% respondents) Very effective Not at all effective Aligning risk management with strategic planning 16 45 25 10 Evaluating risks associated with emerging opportunities 14 41 33 10 Providing an early-warning system for emerging risks 10 31 41 15 Understanding the impact of emerging risks on the business 11 41 35 12 Prioritising and mitigating emerging risks 11 31 38 37 12 © The Economist Intelligence Unit Limited 2011 Appendix Survey results The long view Getting new perspective on strategic risk How effective are your company’s risk functions at helping to manage the following? Rate on a scale of to 5, where 1=Very effective and 5=Not at all effective (% respondents) Very effective Not at all effective The pace of external change 37 34 16 The emergence of new and unexpected threats 10 35 36 15 Continuing economic volatility 37 40 13 34 41 13 Increasing business complexity Unpredictable market demand 30 42 17 14 Spotting emerging opportunities 30 42 Dealing with long-term challenges such as climate change 18 35 23 17 What single change would help your risk functions a better job of taking a more forward-looking and long-term approach to risk management? (% respondents) More risk expertise 21 More time and resources 14 Better data 13 Better tools and processes 11 More business expertise 10 Wider range of perspectives 10 Closer integration with the strategy team Better technology Better relationship with senior management Other, please specify Which of the following does your company currently have in place or plan to have in place? Please select one for each row (% respondents) Currently in place Plan to put in place No plans to put in place Chief risk officer 34 15 51 Board-level risk committee 42 21 37 Enterprise risk management programme 35 30 35 Governance, risk and compliance programme 53 26 21 Formal risk appetite 31 32 32 © The Economist Intelligence Unit Limited 2011 37 Appendix Survey results The long view Getting new perspective on strategic risk What steps does your organisation need to take to ensure better alignment between risk management and strategy? Select all that apply (% respondents) Stronger risk culture and awareness among business units 50 Greater risk management expertise at executive board level 45 Stronger commitment to enterprise risk management 44 Risk management needs to be more forward-looking in its approach 34 Risk managers need to present themselves more effectively as business enablers 33 Greater risk management expertise at non-executive board level 32 Perception of risk management as a “support function” needs to be eroded 29 Better knowledge of the business among risk professionals 27 Other, please specify How frequently does your risk function report in writing to the board? (% respondents) Every quarter 34 Monthly 22 Every six months 13 Annually 10 Weekly or more often Less than annually Never 10 Please indicate whether you agree with the following statements (% respondents) Strongly agree Slightly agree Neither agree nor disagree Slightly disagree Strongly disagree Agility and flexibility are more important than the ability to plan for the long term 34 39 15 Our company does not spend enough time thinking about the risks it might face ten years from now 21 32 24 14 The relatively short average tenures of most C-level executives mean that there is little incentive for companies to look at risks more than five years into the future 22 34 21 14 20 Looking far into the future tends merely to confirm what we already believe rather than giving us any new information 11 35 25 Investors are not particularly interested in knowing what risks the company will face ten years into the future 17 29 21 22 11 It is better to bring third-party consultants in to help us think about the long-term future because they introduce fresh perspectives 12 32 27 19 10 24 The risk function in our business needs to more to challenge management’s view about how the future might unfold 22 33 44 © The Economist Intelligence Unit Limited 2011 Appendix Survey results The long view Getting new perspective on strategic risk In which region are you personally based? (% respondents) Western Europe 28 Asia-Pacific 27 North America 26 Latin America Middle East and Africa Eastern Europe What is your primary industry? (% respondents) Financial services 26 Professional services 15 IT and technology Manufacturing Healthcare, pharmaceuticals and biotechnology Education Energy and natural resources Construction and real estate Government/Public sector Entertainment, media and publishing Consumer goods Chemicals Transportation, travel and tourism Automotive Logistics and distribution Aerospace/Defence Retailing Telecommunications Agriculture and agribusiness 34 © The Economist Intelligence Unit Limited 2011 Appendix Survey results The long view Getting new perspective on strategic risk What are your company's annual global revenues in US dollars? (% respondents) $500m or less 52 $500m to $1bn $1bn to $5bn 13 $5bn to $10bn $10bn or more 20 Which of the following best describes your job title? (% respondents) Board member CEO/President/Managing Director 29 CFO/Treasurer/Comptroller CIO/Technology Director Other C-level executive SVP/VP/Director 17 Head of Business Unit Head of Department Manager 13 Other, please specify 35 © The Economist Intelligence Unit Limited 2011 While every effort has been taken to verify the accuracy of this information, neither The Economist Intelligence Unit Ltd nor the sponsor of this report can accept any responsibility or liability for reliance by any person on this white paper or any of the information, opinions or conclusions set out in this white paper Cover image - © UniqueLight/Shutterstock LONDON 26 Red Lion Square London WC1R 4HQ United Kingdom Tel: (44.20) 7576 8000 Fax: (44.20) 7576 8500 E-mail: london@eiu.com NEW YORK 750 Third Avenue 5th Floor New York, NY 10017 United States Tel: (1.212) 554 0600 Fax: (1.212) 586 1181/2 E-mail: newyork@eiu.com HONG KONG 6001, Central Plaza 18 Harbour Road Wanchai Hong Kong Tel: (852) 2585 3888 Fax: (852) 2802 7638 E-mail: hongkong@eiu.com GENEVA Boulevard des Tranchées 16 1206 Geneva Switzerland Tel: (41) 22 566 2470 Fax: (41) 22 346 93 47 E-mail: geneva@eiu.com [...]... Cross-functional committee below board level 4 No one has overall responsibility 4 Non-executive board 2 We do not conduct long- term risk management 3 Don’t know 1 16 © The Economist Intelligence Unit Limited 2011 The long view Getting new perspective on strategic risk But despite the prevailing view that the executive management and board are ultimately responsible for strategic risk management, there are... most senior executives 7 Other, please specify 3 We do take a longer-term view of our risk exposure 8 27 © The Economist Intelligence Unit Limited 2011 Appendix Survey results The long view Getting new perspective on strategic risk Who in your company is responsible for exploring the potential impact of long- term risks on corporate strategy? Please select one only (% respondents) Chief executive officer... role than a year ago Risk management will play the same role as a year ago Don’t know 18 © The Economist Intelligence Unit Limited 2011 55 5 38 2 The long view Getting new perspective on strategic risk Chart 13: How would you rate the quality of managerial engagement between the risk function and the following individuals or groups when considering long- term risk issues? Rate on a scale of 1 to 5,... we are continuing to push our horizons outwards We are on a journey but we still have some way to go.” © The Economist Intelligence Unit Limited 2011 The long view Getting new perspective on strategic risk Key points n Risk functions continue to take on bigger roles in their companies’ strategy development n However, risk management is still primarily viewed as an operational, rather than strategic, ... of the business among risk professionals 27 Other, please specify 2 17 © The Economist Intelligence Unit Limited 2011 The long view Getting new perspective on strategic risk frames how we view signals from the market and from competitors.” Business leaders who are unwilling to hear dissenting opinions and who surround themselves with teams who share their viewpoint are particularly unlikely to miss the. .. that a focus on the longer term is maintained “With the responsibility for the long- term health of the organisation sitting squarely in their lap, the board needs to push management to think beyond the next quarter or fiscal year,” says Mr Worley The more they can get involved in encouraging management to think longer term, the better they will be fulfilling their own responsibilities.” Rather than be... threats, and find new ways of doing business that can give them long- term competitive advantage 24 © The Economist Intelligence Unit Limited 2011 Appendix Survey results The long view Getting new perspective on strategic risk Appendix: Survey results Do you have responsibility for, or influence over, strategic decisions on risk management in your company? (% respondents) Yes, as CEO or other board-level... categories “Rather than deciding on a strategy then testing it for risks and uncertainties afterwards, companies should approach their strategic discussions in a more exploratory way where they are 13 © The Economist Intelligence Unit Limited 2011 The long view Getting new perspective on strategic risk Chart 9: Over the past year, what changes have you made to the following aspects of your risk management... mangers ensure that they play a role in key strategic decisions? Steve Fowler, 19 © The Economist Intelligence Unit Limited 2011 The long view Getting new perspective on strategic risk chief executive of the Institute of Risk Management, argues that risk officers need to put themselves forward and take a proactive approach rather than waiting to be asked for input The most successful risk managers will... strategic conversation among multiple parts of the organisation” says Mr Blau “This enables the company to develop a holistic view of risk that spots potential threats as well as opportunities for new growth and advantage.” In this way, risk is no longer compartmentalised in the risk function, but becomes the responsibility of everyone across the business While the technical aspects of risk will remain the ... conduct long- term risk management Don’t know 16 © The Economist Intelligence Unit Limited 2011 The long view Getting new perspective on strategic risk But despite the prevailing view that the executive...  © The Economist Intelligence Unit Limited 2011 The long view Getting new perspective on strategic risk Long- term risk management is rising on the agenda for many business leaders Over the past... results The long view Getting new perspective on strategic risk How would you describe the contribution of risk management to meeting your organisational priorities in the coming year, versus the