Compliance risk, global financial socks and ageing workforce top Ernst & Young’s survey of biggest global risks
Global financial shocks and ‘radical greening’ are among some of the biggest risks for international businesses in 2008 and beyond, according to a new report.
The report by Ernst & Young and co-authored with Oxford Analytica, identifies the top ten global risks across international business sectors, based on the views of 70 academics and sector specialists from across the world.
The risk of a global financial shock is now a critical issue not just for the financial markets, but for the real estate, biotechnology, oil & gas and utilities sectors, according to the report.
As one respondent put it, “A crisis in structured finance markets could lead to potential systematic problems. Sustainability of financial sector growth is more fragile than markets realise. There is the potential for dramatic fall out from excessive leverage.”
‘Radical greening’ – the growth in environmental concerns – also made its way into the top ten risks list, although it was considered a very low risk for the pharmaceutical, biotechnology, banking, telecoms and media & entertainment sectors, said the report.
Gerard Gallagher, head of business risk services at Ernst & Young, believes these sectors don’t consider greening a major risk because their business is not dominated by carbon emissions. But he says they are wrong to think it does not touch their business.
“CEOs need to be more open-minded about risk, they should look beyond financial and regulatory risks to the wider environment in which their organisation operates. It is important that all boards have strategic business risks on their radar, ignoring them is not an option as they can be the quickest and most permanent destroyers of stakeholder confidence and that's not good news for CEOs
Fiona Sheridan, head of risk advisory services at Ernst & Young
Gallagher said: “The carbon agenda is starting to cut across all sectors and affect consumer demand. These sectors could therefore be exposed if they view this as an operational risk rather than a strategic risk. For pharmaceutical companies, climate change affects disease and how disease is spread. This could have significant impact on pharmaceutical product distribution and future product development.”
The ever present daily risk of global rules, regulations and compliance featured in the top three threats to business. Regulator intervention was seen as a threat to a healthy competitive environment, which fundamentally changes business models.
Fiona Sheridan, head of risk advisory services at Ernst & Young, said: “Globalisation continues to cause a major compliance headache for many organisations, which are frequently being forced to manage diverse regulations as they expand into new markets. The response from business to these challenges has largely been either to back away from opportunities because of regulatory restrictions or to build up a “layer cake” of internal risk activities that barely touch each other.”
Gallagher added: “The global heavyweights of tomorrow are already identifying these risks and developing strategies to use them as a point of competitive advantage in the race for increased market share. Someone’s challenge is frequently someone else’s opportunity – and how an organisation exploits strategic risk will be what separates the winners from the losers.”
Sheridan concludes: “CEOs need to be more open-minded about risk – they should look beyond financial and regulatory risks to the wider environment in which their organisation operates. It is important that all boards have strategic business risks on their radar – ignoring them is not an option as they can be the quickest and most permanent destroyers of stakeholder confidence and that’s not good news for CEOs.”
According to the report:
The top ten strategic business risks identified in the report are:
1. Regulatory and compliance risk
2. Global financial shocks
3. Ageing consumers and workforce
4. Emerging markets
5. Industry consolidation/transition
6. Energy shocks
7. Execution of strategic transactions
8. Cost inflation
9. Radical greening
10. Consumer demand shifts
The survey also asked the analysts to identify those risks outside the top ten that had the potential to become globally significant within the next three to five years.
The five most likely to become serious factors are:
1. The war for talent
2. Disease pandemic
3. The rise (and possible fall) of private equity
4. Inability to innovate
5. China setback