CEO View

CEO VIEW

Scope for growth is out there, but the risk register is flashing red and amber

Nick Allan |Chief Executive Officer

If resilience was one of the defining characteristics of the past year, then adaptability and resourcefulness will be at the core of organisational success in 2022.

Charles Dickens opens his masterpiece “A Tale of Two Cities” with the famous line “It was the best of times, it was the worst of times”.  It is hard to think of a more apposite start to an article that tries to capture how Control Risks and its clients are looking at the year ahead. During the latter part of 2021 we have seen a cautious and inconsistent emergence from the pandemic, particularly in North American and European economies, and a shift from “zero COVID” to “living with COVID” strategies in most countries. This has been most marked in developed economies, which have prioritised vaccinating their own citizens ahead of more global and altruistic concerns, leaving in their wake an endemic and still global threat. 

As international travel and trade have resumed and citizens have been given renewed freedoms, we have seen countries rebound at pace. With percentage growth in developed economies sometimes hitting double figures, those companies that have weathered the storms of the past two years are responding to that growth and seeing opportunity both at home and abroad. Many firms find themselves leaner, more focused, and with a stronger brand and deeper connection to their core markets. Access to capital remains cheap and abundant as cash seeks a return and technology has leapt forward to drive efficiency and effectiveness. In more normal times the optimism in the board room would be palpable and bullish. 

And yet, and yet…

Dickens went on to write “it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair”. He may well have had a prescient view into 2022. There is no doubt that the sudden shocks of 2020 and 2021’s aftershocks have left many companies scarred and bruised. Indeed, in some sectors businesses have only survived thanks to government support. As the world emerges blinking into the Dickensian sunlight, many companies are surveying a landscape that looks both familiar and very different at the same time. Looking to 2022, opportunity for growth can be found in abundance but, at the global level, red and amber lights continue to flash on the risk register dashboard. 

Many of these risks are familiar and were part of trends well in train before the pandemic. Geopolitical or environmental shocks had already driven the retreat from a globalised, just-in-time supply chain. The acuity of cyber threats and the lack of rules on the new frontier of intra-state tension were issues that business has grappled with for the past five years. However, there is growing realisation that national governments are unable to enforce red lines around cyber sovereignty and that corporates will have to defend themselves. New challenges in data regulation and the arbitrary enforcement of rules to reinforce national political agendas are a familiar obstacle to commerce in many jurisdictions. 

There is little doubt that the pandemic has accelerated trends in many areas. Technology has leapt forward and business has embraced remote working. There have been significant advances in telemedicine and drug development. However, in other areas the impact has been less positive. At the geopolitical level the US continues to question its role as a global leader enforcing a rules-based system while coming to terms with a more assertive and more powerful China. The geostrategic competition between these two great powers will certainly define the next decade, and the necessary insularity of global health restrictions has exacerbated tensions and misunderstandings. 

In the vacuum created by US disengagement, other powers are looking to find fresh voice and influence. For some, and as has always been the case, international expeditions are deemed to be a necessary diversion from domestic problems, while for others perceived security concerns or opportunism drive new adventures. For the EU, soft power and economic might seem somehow inadequate tools for a world where others are prepared to resort to more traditional methods of political persuasion. This geopolitical backdrop makes planning for international business in 2022 complex and confusing, particularly for investments with a longer-term horizon. 

Many of the people that run international businesses developed their skills and experience during an era of relentless globalisation. The challenge was to find new markets and identify opportunities for supply-chain efficiencies, with an implicit assumption that globalisation would deliver wealth and prosperity that would be almost universally welcomed. As the world headed into the pandemic such assumptions were already being questioned. In mid-2021, the effects on supply chains of the disruption caused by public health restrictions were being acutely felt in certain places, particularly those businesses that depend on semi-conductors as an example. What we have seen since though is the more systemic vulnerability that developed economies face as demand has come roaring back.

For those of us in the risk management industry, 2021 has been the year high-impact threats moved from very unlikely to almost certain. Cyber attacks have taken out major pipelines, dependence on foreign suppliers has caused huge spikes in domestic energy costs, and tensions between nations have led to conflict either directly or through proxies. The drivers of domestic and international terrorism will continue to be influenced by the impacts of the COVID-19 pandemic and, to an as yet unknown degree, the return to power of the Taliban in Afghanistan. Business has, as ever, been remarkably resilient and adaptable, but there is a new awareness that the risks that sit in the high impact/unlikely quadrant do happen, and sometimes concurrently. All of this is making companies more cautious and also feel more isolated as the rules that governed the previous decades seem less enforceable, more arbitrary and politicised, or sometimes absent altogether.

The overriding preference of most companies is to be seen as politically neutral, and ideally a source of societal benefit. In an era of geostrategic competition, such neutrality is harder to maintain. With that has come added scrutiny of the benefit or otherwise that commercial activity delivers. While some of this is driven by domestic political concerns, business leaders now know that their own people also expect their employers to take a stance and put people and the planet before profit. This dynamic is already driving the investment choices that companies make, as much of the focus on ESG comes from institutional investors, though it should be noted that few seem prepared to advocate a reduction in profit, even if it may sometimes seem like a necessary trade off. However, despite a certain degree of cynicism that can be fairly directed at some corporate pronouncements, the growing international consensus about the need to protect the planet against the effects of a changing climate will have a significant impact on corporate capital allocation in the coming years. Energy and mining companies are on the front line of change, but no sector will – or indeed should – be immune from the imperative to respond to environmental concerns. As with all times of change there will be both risk and opportunity and resistance and acceptance in unequal measure. 

The world will continue to rebound in the coming year and as more countries open up, growth will surely follow. However, business will often find itself caught between geopolitical, regulatory, environmental and societal tensions that will require significant resources to mitigate and manage. If resilience was one of the defining characteristics of the past year, then adaptability and resourcefulness will be at the core of organisational success in 2022. For corporate leaders courage will be needed as they look to find light, wisdom and belief. 

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