Pessimism and the polymaths

No, not another new indie band you haven't yet heard of but the challenge of being a successful strategic risk manager in 2024. So was the theme of the Conference Board's Strategic Risk Managment Council?meeting, convened in Brussels last week. A group of 25 senior risk managers, who came together from leading global corporations, to better understand how to tackle the increasingly volatile and uncertain world within which they operate.

Representing multiple sectors, including financial services, travel-tech, big pharma, energy, industrial, agriculture and FMCG, they had a number of concerns, spanning risks to supply chains, security of IT systems / data, policymaker agendas, growth (or the lack of it) in China, possible friction costs associated with de-carbonisation and energy transition, broader ESG issues, stability of the global trading environment and the huge uncertainty surrounding the implications of AI for their organisations.

In addition to such macro risks, there were a number of very specific challenges, within their own organisation, including their ability to identify, mitigate and / or manage these issues, not least:

• Cultural / organisational biases
• The limitation of assumptions / forecasts making up "an official future" (the future you assume to be true, but rarely is)
• Lack of time and attention from senior management / decision-makers
• An inability to partner effectively with colleagues in strategy
• The struggle to link / transform risk into opportunity
• Lack of challenge and diversity amongst senior decision-making teams
• An inability to think genuinely long-term and strategically (the "urgent" outweighing the "important").

Not surprisingly, faced with such a challenging agenda, it is easy to become very pessimistic about the future business environment. This is supported by data from the recently launched World Economic Forum Global Risks Report 2024. The supporting annual survey of over 1800 senior risk managers indicated that 30% of those asked perceived the world to be either "stormy" or "turbulent" over the next 2 years. This figure jumped to an astonishing 63% over a 10-year horizon. The remaining polled, mainly saw the outlook as "unsettled". I have yet to meet a risk manager from the 1% "calm" category. They certainly weren't with us in Brussels last week!

In many ways, these statistics shouldn't be a surprise. For over 3 years now, commentators have been talking about a "polycrisis"; the confluence of multiple challenging macro events hitting the global economy at the same time. From the more cyclical; pandemics, military conflicts, inflation shocks and stagnating economic growth, to the more structural; climate change, forced migration, rising populism / protectionism, the impact of new technologies and of course challenging demographics.

The Brussels meeting kicked off with two excellent keynote presentations from Ilaria Maselli (Head of Trade Flows Insights & Economics at 马士基 ), on global trade and Christopher Geiger (Chief Audit Officer & Head of Risk at Lockheed Martin ), on geopolitical risk. Each laying out the specific challenges and future uncertainties member organisations could expect when operating in the global environment in the coming years.

Ilaria highlighted near term expectations for modest global economic growth, despite ongoing challenges in the Red Sea and with Chinese exports. While the US consumer seems robust for now, the EU runs the risk of falling behind and losing long-term competitiveness, in her view. A number of uncertaintes lingered, not least the potential for stubborn inflation, the impact of climate change and the unpredictability of policy in a year of so many scheduled political elections.

Christopher focused on the rising influence of state power and intervention. A force once thought to be on the wane not so long ago. In reality, global corporations are simply not "running the show" in the way some expected. He foresaw global conflict and security issues, including cyber-attacks, to continue to be very challenging (or indeed offer opportunity, depending on which business you are in). Either which way, he proposed that traditional risk management tools (impact vs probability etc.) are not very helpful in thinking about geopolitical risk. Thinking more systemically and stragically, embracing resilience and "antifragile" tools, such as scenario planning, are likely to be more productive.

Building on these concepts, the Council engaged with a set of pre-created global macro scenarios to help make sense of how boarder global risks may play out over the next 10 years. The framework used was built around two critical uncertainties; 1) "response to climate change" (faster, more effective" vs. "slower, less effective"), and 2) "geopolitics and global trade" (from "increasingly fractious" to "increasingly harmonious").

Once divided into a "parallel processor" of 4 sub-teams, each group had to assume that their assigned scenario was indeed the future, before engaging their colleagues in a series of insightful discussions around; 1) "let's imagine / what if?"; 2) "so what?" if this future did unfold and finally "what next?", how might we respond.

A number of interesting insights emerged from the discissions, not least:

1. While at first blush, some of the scenarios may have been perceived as more "positive" than others, it soon become clear that each in turn would offer their own specific mix of challenge and opportunity.
2. The plausibility of each potential future increased as each group fleshed out and better understood the underlying logic and deep drivers.
3. When creating a scenario narrative, it is important to balance "relevance" with "stretch". Too much of the former and there is no challenge to the usual way of thinking about strategic risk. Too little of the latter and you run the risk of being ignored.
4. Try to avoid thinking about probabilities of the different scenarios, as the risk is that you simply revert to the expected (or "official") future, missing key tipping points that may transform an industry.
5. Events unfolding today could be attributed to the starting logic of at least 3 of the scenarios, leading to cries of "this is what we are living through right now".
6. The importance of building / automating horizon scanning into a scenario planning process is critical, ideally against a pre-identified set of "early warning signals", to indicate that the world is shifting in a way that you have already thought about and prepared for.

Towards the end of the session, we had a very honest conversation about the skill set and capabilities required to be successful as a strategic risk manager in the current (and future) business environment.

• As Christopher Geiger in his opening comments suggested, traditional risk management tools would not be sufficient to identify, understand and mitigate strategic macro risk
• Challenging the status quo and breaking organisational group-think was essential
• Linking risk and opportunity was critical to building deeper relationships with the strategy function
• Getting senior decision-makers to emotionally connect to the new insights and recommendations is critical to move beyond just "an interesting academic exercise"
• Risk managers do need to embrace multiple-disciplines and become more like "polymaths" to succeed in a polycrisis world

Finally, a similar meeting 10 years ago in London reached the conclusion that a global pandemic was the most important strategic risk to prepare for. Further evidence, as if it were needed, debunking the idea that COVID was an unforeseeable "black swan". This time, the group voted for "social instability and friction" as the number one risk.

Watch this space!

For further advice in successfully navigating your organisation through an uncertain future, contact Nick Turner at Stratforma.