Loss of customers and cancelled orders
From concern about the availability of credit, business leaders are now facing an even more fundamental risk; the evaporation of those wanting – or able – to buy.
There are multiple reasons for this concern about loss of consumers. Western governments are driving down their deficits by cutting back both on investments their spending on public services. At the same time, the high cost of raw materials and of energy has driven up inflation, making many products more expensive.
Consumers in North America and Europe are paying down their debts, buying less and buying more cheaply when they do. The debt crisis in the eurozone is affecting global stock markets and dramatically eroding the world’s wealth.
Emerging economies such as India and China are changing focus as they deal with the dual issues of reduced international demand and escalating domestic consumption.
Against a background of dwindling demand for goods and services, supply chain failures or reputational damage can mean the difference between business survival or collapse. As margins are increasingly squeezed, mitigating against these types of risks has become more important than ever.
Talent and skills shortages The prioritisation of ‘talent and skills shortages’ as the second most important risk facing businesses - and one of only two risks respondents felt insufficiently prepared for - begs many questions.
In a time of business mergers and record unemployment, the pool of surplus talent should, in theory, be significant. And yet, at the very top of organisations, there is huge anxiety about the suitability of available staff for the roles required.
Concern over talent or skills shortages could be due to a number of factors, some of which are discussed in the Index. Respondents across all sectors agree this is a significant and widespread problem.
The resulting business risks could include everything from poor product development to inappropriate risk management strategies.
Many sectors are waking up to the risk and taking action. Some companies, for example, are undertaking audits to identify staff at risk of being poached and targeting packages accordingly.
But prevention is just part of the solution and many industries are investing in processes to identify and train the talent they need from scratch.
Reputational Risk In 2009 reputational risk was ranked ninth; in 2011 it comes third.
The intervening two years have seen the unfolding of a reputational crisis in many countries. While politicians, bankers and ratings agencies have all come under scrutiny, business has not escaped criticism either.
From recalls by car manufacturers in the US, Europe and China to the Deepwater Horizon disaster’s impact on BP market value to the dip in the price of Blackberry shares, awareness of the impact of reputation on the bottom line is growing.
The Risk Index shows that businesses actually believe they are actually over-prepared to deal with reputational risk.
At a time when the reputation of companies is becoming of greater importance to consumers, and therefore to shareholders, it will be interesting to see if events confirm this degree of optimism.
Currency fluctuation The number two priority given overall to currency fluctuation in 2009 was geographically almost universal, appearing in the top five risks of all regions apart from North America.
Two years later, the crisis in the eurozone has proved deeply destabilising.
The write down of Greek debt this autumn led to concerns about Italy and Spain’s ability to service their government’s debts.
The Prime Ministers of both countries became casualties of the crisis and 2011 ends with speculation that the eurozone may not survive in its current form.
Interestingly, despite its major current account surplus, China has shown little enthusiasm for buying European debt during the recent crisis.
Given the volatility of global markets, low yields in safe havens appear increasingly likely to be the investments of choice for governments and corporate investors, for the foreseeable future. Investment yields will be increasingly inadequate to subsidise unsustainable businesses.
Changing legislation
The global financial crisis has provoked a major legislative response. For the banking industry, the capital requirements of Basel II have been added to by the provisions of Basel III.
Internationally, G20 leaders are taking steps to give the Financial Stability Board greater power to ensure both Basel III and subsequent requirements are implemented consistently across all countries.
In the United States, the Dodd-Frank Act has overhauled the previous agency oversight system for financial services, adding additional layers of supervision and accountability and raising reporting standards.
In the East too, many fast growing economies are approaching their problems by tightening regulation, creating opportunities for businesses.
China’s resolve, for example, to tackle its status as the world’s biggest polluter offers opportunities to a range of waste and other environmental businesses.
It also serves as a warning that business practices which worsen China’s environmental health are less likely to be tolerated in the future.
