Why Should Companies Prioritize Risk Management and How?
The events of 2020 can be thought of as a wake-up call for businesses across the globe. The pandemic has made it glaringly obvious that companies need committees consisting of diverse skillsets.
If we take a look at how businesses across the world responded to the pandemic, we can see that no one performed well. Most businesses completely failed at predicting the pandemic and gearing up for it. The ones that did manage to see it coming weren’t able to respond properly either. According to experts, this is thanks to the fact that a pandemic is one of the rarest risks that anyone can think of. It was certainly the last thing that people were expecting.
Businesses were far too focused on other more immediate factors. For instance, the higher ups were concerned about competition from digitization and how to counter it. If we take a look at the USA, some of the S&P 500 companies were somewhat prepared. Their list for risk factors in 2020 had health crisis mentioned on it.
Who Was Prepared?
It is interesting to note that a certain number of businesses were able to take the hit better than the rest. Businesses that had taken measures to withstand risk events such as earthquakes were better prepared for the pandemic. These kinds of businesses had plans for shifting to online selling and home-based work in unforeseen circumstances. Companies with board members who had previously experienced pandemics were able to fare better as well.
We can tell that a lack of experience with disasters led to slow decision making. Certain Asian companies were able to respond better as well since their boards were decisive about the decisions that they made.
As for the rest of the world, businesses were way too focused on the immediate repercussions of the pandemic. They were devoted towards preserving their reserves, strengthening their IT and getting government help in order to keep their employees. A lot of companies took government grants in order to retain employees. However, we can expect these companies to face massive backlashes from the media once they reach the end of these grants and let their employees go.
Resources had to be wasted in order to bring board-members up to date on remote working methods. The COVID-19 virus is planning on sticking around. This means that companies across the globe are going to have to reassess their methods of risk management. The only way to do this is to make risk management a primary topic in every major meeting.
Dynamic Risk Management
So far, risk management was a static thing. Companies would generally devote 10% of their resources to prepare for risks. This approach obviously didn’t work out too well. In order to improve risk management, companies will need to devote a lot more effort into improving their foresight and their responsiveness.
Companies will need to think of how pandemics and other disasters may upset the global supply chain in the future. They will need to figure out how to maintain a balance between being efficient and being resilient. According to experts, the pandemic is going to force many businesses to become risk averse. This may seem like a good thing to do, but it’s the same as putting your head in the sand rather than taking action.
How Can Businesses Refocus Risk?
- Discuss risk management in every board meeting and make sure to tie it with a company’s operational side.
- Ensure that risk management boards have diverse skillsets.
- Research past disasters and derive data from them in order to improve decision making in the future.