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3 CHALLENGES FOR CXO'S WITH APAC'S TOP 10 RISKS

By RL Expert Leesa Soulodre

This post highlights the 3 challenges in APAC's top 10 Risks for Boards and CxO's and provides a novel approach to intangible capital risk assessment and counter measure selection.

According to 144 of the region’s top corporate Risk and Insurance Managers that took part in Strategic Risk Magazine's 2014 survey, the top 10 risks in the Asia Pacific are :

  1. Economic conditions in key economies;
  2. People risk, talent and retention;
  3. Damage to company reputation/ brand
  4. International competition;
  5. Tightening and changing regulation;
  6. Political risk;
  7. Price of materials/commodities;
  8. Loss of customer/critical data;
  9. Cyber attack; and
  10. Pandemic.

Source: Strategic Risk Magazine, December Edition, pp16-17

STRATEGIC RISK MAGAZINE - APAC'S TOP 10 RISKS

There are 3 key challenges for Boards and CxO's with the list of risks on today's risk register:

  1. many of these risks are complex to manage in isolation - i.e. they are either intangible risks or risks interrelated to other risks (cause and consequence)
  2. many of these risks cannot be mitigated using traditional risk transfer methods such as traditional insurance products
  3. many of these risks are largely beyond the control of any one company and require a CRO contribution beyond that of a Functional Practitioner

1. The intangibility and interconnectivity of risks

When we examine the top risks in the Asia Pacific, CxO's acknowledge that a number of these top risks cannot be measured or mitigated in isolation. This is because they are interrelated - for example if you have a cyberattack (cause), it can negatively impact your reputation (consequence), which can then impact a firm's ability to attract, retain and acquire top talent (consequence) or its competitiveness (consequence).

In addition, a number of these risks are considered "intangible risks". Leif Edvinsson introduced the notion of intangible capital for the first time in 1999 and broke it down into four categories: Organizational Capital, Relational Capital, Human Capital and Produced Capital.

Tangible risks can be easily quantified in dollar terms. Intangible risks are more challenging as they cannot be reasonably predicted or quantified.

CALCULATING INTANGIBLE CAPITAL

2. Insurance is no longer an adequate solution anymore for Risk Transfer

Of a Chief Risk Officer's Group risk register it was noted on average that less than 15% of identified risks were insurable using insurance products available in the market today (PARIMA Conference 2014). This highlights that traditional sources of risk transfer, such as insurance are not able to keep up with the changing morphology and intangibility of risks. It also highlights an enormous opportunity for innovation in the insurance sector.

It also highlights that those CxO's relying on dated methods of insurance and hedging alone for risk transfer are no longer doing their jobs effectively. If you can secure insurance for your specific identified risk, it still will not protect the organisation from the interrelated downsides (e.g. reputation risks, impact to competitiveness, impact to human capital etc).

3. Changing role of Chief Risk Officer

Given that a number of APAC's top risks are the result of both economic and political uncertainty and the rapidly changing technological and business environment, it highlights the point made in the Global Financial Crisis of 2008: interconnectivity and interdependence can be both an advantage and disadvantage to companies, sectors and countries!

This highlights the fact that for a Chief Risk Officer to be effective in the new Asian Century they now have 3 roles:

  1. as a Company contributor in their traditional functional Risk Management role as a member of the Corporate Leadership team and engaging across their internal multidisciplinary stakeholder team
  2. as a Sector and Country contributor in both their industry and local/regional Business community groups, in engaging across a wide array of external stakeholders in order to more effectively assess risks
  3. and as an active individual contributor at Board level in both setting thecompany strategy and an accurate risk appetite/tolerance setting.

I would like to leave you with some food for thought - a novel approach for intangible risk assessment and countermeasure selection.

Many of today's Risk Managers choose to evaluate such risks using a simple method of probability and hazard to assess impact.

RISK MANAGEMENT

Using Germon, Laclémence and Birregah's 5 factor ICRA (Intangible Capital Risk Assessment) model (2012), a more accurate quantification of effective risk evaluation and countermeasure selection could be achieved.

In simple terms their ICRA approach includes detailed evaluation of the:

  1. Threat
  2. Vulnerability
  3. Criticality
  4. Impact, and
  5. Exposition

The model specifically focuses on the characteristics of both the threat and the specificity of the intangible capital, in order to select the most efficient countermeasures either to adapt to the threat or to decrease the vulnerability of the Intangible Capital.

From this more accurate assessment, a Board can then effectively consider both its Risk Appetite and Risk tolerance for the identified risk.

Sources:

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About RL EXPERT Leesa Soulodre

Managing Partner and Founder of RL Expert Group, an international reputation and risk management think tank and consulting practice. A Member of the Global Advisory Council of NY Investment Advisory Firm, Cornerstone Capital; an Innovation Advisor to the University of Illinois Urbana Champaign Advanced Digital Science Centre, Singapore and Board Advisor to Belgian PR Software firm, Prezly and US Sports Analytics firm, Autoscout.

An Adjunct in Corporate Communications at Singapore Management University, lecturing part time on "Risk Issues and Crisis Management "and "Content Strategy" at the Lee Kong Chian School of Business. Prior to moving to Asia, spent 7 years part time in European Academia, lecturing on the Luxury MBA programs in Marketing, Communications and Reputation Management at two french business schools, Ecole Superieur de Gestion and Mod'Art International.

Connect: Leesa Soulodre, Managing Partner, RL Expert Group - ls@rlexpert.com

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