Make safety net strong, and wide

Robust management of risk and strategy in uncertain times is not just about having a strong safety net, it is also about making sure that the net covers enough ground, business leaders said.

Besides making sure that internal issues such as corporate governance, balance sheet strength and data analysis are strong, leaders also have to keep an eye on the bigger picture both in terms of longer-term objectives as well as potential disruptions, those leaders said.

"Being change-agile in business is key to dealing with economic uncertainty," said PricewaterhouseCoopers Singapore executive chairman designate Yeoh Oon Jin. "It is what businesses do in preparation for the lean years that enables them to adapt and deal with tough economic conditions."

Businesses today are caught in a maelstrom of macroeconomic forces.

A simmering debt crisis in Europe threatens to boil over, while the United States is facing a combustible mix of a fiscal cliff, stubbornly high unemployment and a presidential election.

Those concerns threaten export economies in Asia, where nervousness about China's slowing growth casts a shadow over the entire continent.

"Amid challenges and uncertainties that confront companies, we observe four inter-related issues that command the attention of business leaders," said Sam Wong, partner at Ernst and Young Advisory. "They are strategic direction, operations, financial and talent management."

In terms of strategic direction, businesses worry about their business model and access to capital, Mr Wong explained.

On the operations side, support functions, supply chain issues and risk systems dominate the discussion.

Companies are also thinking about capital management - how to maintain liquidity and balance debt while keeping the ability to capture growth opportunities, Mr Wong said.

And human resources need to be managed as well, whether it is protecting talent or rationalising the workforce.

Businesses have not been blind to the need to address risk.

Between 2002 and 2010, KPMG's Risk Management Survey showed that adoption of enterprise-wide risk management frameworks have increased from just 4 per cent to 50 per cent of companies surveyed, said KPMG risk consulting partner Richard Tan.

It is in uncertain times that "we see an increase in financial, operational and compliance risks associated with running a business", Mr Tan said. "Consequently, we are seeing the impetus for enhanced risk management practices in support of building business resilience."

In thinking about risk, businesses have to first make sure that they cover the right issues, Mr Yeoh said.

For example, when thinking about expanding, it is important to think not just about how to enter a new market, but also how to stay there.

"Focus on the right strategic risks," he said. "Many executives focus on market entry risks, but underestimate the risks that come with market presence in a new country. They assume that it is enough to have good people on the ground and a good understanding of the land. As businesses seek growth outside familiar markets, they must adapt their risk practices to each country's economic, social and political conditions."

An intelligent and robust risk management system needs to anticipate issues and address them quickly rather than wait for problems to emerge, Mr Yeoh said.

"Be proactive, rather than reactive," he said. "These days, previously unknown risks can manifest themselves with unprecedented speed. To respond effectively, companies must adopt more sophisticated and integrated risk management approaches.

"If you simply ask, 'What could go wrong?', you could end up focusing on an endless list of scenarios instead of actively identifying key vulnerabilities and solutions for achievable outcomes. Business leaders must constantly return to the fundamental question: 'How must my business practices evolve, to profit from the torrent of change underway around the world?'"

Targeted controls

Ernst & Young Advisory partner Neo Sing Hwee said that businesses have to strike a balance between the three objectives of managing risk, value and cost.

He noted that an Ernst & Young study showed a high correlation between financial performance and the level of integration across risk, control and compliance functions.

The key is to make sure that internal controls are aligned with the appropriate risks and opportunities.

Businesses have to "ensure that their internal controls are aligned with the overall organisational risk profile, strategy and objectives, which need to be clearly defined, well understood, communicated and consistently deployed and measured", Mr Neo said.

"The strategy and objectives should be continually challenged and enhanced to recognise changes in the organisation and external environment in order to drive and achieve market-leading performance."

Chaly Mah, chief executive of Deloitte Asia Pacific, said that the importance of corporate governance should not be discounted.

"Very often, when businesses grow and grow beyond the size of the internal infrastructure, it can no longer support the business, and that is when the risk starts to come in," Mr Mah said.

"So as businesses grow, they have to ensure that their own internal infrastructure, support system, internal control system can support the growth in their business so that they don't have anything falling through the cracks."

Regulators are also taking a closer look at governance, raising compliance risks on that front as well.

Having a solid risk management process in place is almost essential to making sure that risk management regulations are met, said KPMG's Mr Tan.

"Without a process in place, the board would be hard pressed to demonstrate that they have exercised due care should this proof become necessary," he said.

Internal audits can be a useful tool to make sure that all systems are sound, Mr Yeoh said.

"Today's shareholders are beginning to consider a company's robustness of internal controls as key elements of long-term success and stability. By utilising internal audit as a natural partner, this provides an added level of confidence over internal controls and risk management," he said.

Constant renewal

A consensus priority highlighted by all the experts was a need to constantly innovate.

"Think long-term," Mr Yeoh said. "Don't stop innovating in the areas of growth you will need for the future. Supporting this capacity for innovation should be a strategic priority. Being innovative is a primary differentiator, especially for CEOs in industries which are undergoing disruptive change - if their business cannot quickly create new products or services that customers will buy, they will not survive for long."

The message is simple to understand. Given the speed at which the winds of change are blowing and shifting, businesses that cannot keep up or stay ahead of the curve will be left behind.

Mr Mah brought up the example of online retailer Amazon.com and now-defunct bookstore Borders.

He noted how Borders, once a giant in the world of book retail, essentially underestimated Amazon.com and its then-unique business model.

"We've been asking companies to ask the question, 'Do you want to be an Amazon or do you want to be a Borders?'" Mr Mah said.

"Look what's happened. Amazon with their business model basically has disrupted the book business. Companies need to be aware of disruptive forces out there. Disruptive forces are not just about technological disruption, they're also about changing the business model that potentially could give you the advantage to disrupt the businesses of your competitors."

But simply talking about innovation will get nowhere.

"Innovation does not happen by chance," Ernst & Young's Mr Wong said. "Rather, innovation is a deliberate effort and investment, and is highlighted by corporate leadership as a key component of the business strategy."

Business leaders should develop a culture in the workplace where everyone is involved in innovation.

"Employees need to be empowered with resources and tools to enable creativity and generate innovation solutions at operational and strategic levels," Mr Wong said.

"For example, Design Thinking methods and concepts have been deployed in some organisations to help employees think in unconventional ways, and hopefully, innovative ideas can be generated and implemented.

"It takes bold leaders to make space (both in terms of physical space and resource capacity) in the organisation and provide support to employees to promote innovation. It is a strategic intent."

Looking at the numbers

Businesses that can harness the wealth of data and information that have been uncovered by technology will have an invaluable tool to stay a step ahead of competition, Mr Mah said.

"The future will be one where this thing about big data, the use of analytics to help you analyse data that's in the company or data that's available in the market, that will become more and more important," he said.

Mr Wong observed that leading businesses have also begun to recognise knowledge as an asset that needs to be managed, along with the more traditional individual and organisational assets.

"When relevant knowledge is applied to business situations, we have business intelligence," Mr Wong said. "With reliable and timely business intelligence, business leaders can make informed decisions and seize opportunities."

A new age

Business leaders ultimately have to realise that the world today is highly interconnected, and an inward-looking strategy alone is no longer enough, Mr Yeoh said.

That can sometimes lead to a change in the status quo.

India's Tata Group, for example, is now the largest manufacturer in the United Kingdom, Mr Yeoh said.

He pointed out that a survey of CEOs by PwC showed that businesses are looking farther afield.

"Their mindset is shifting away from BRIC (Brazil, Russia, India and China) markets, and beginning to focus on solid growth and rising domestic spending power in more economies worldwide, such as Indonesia and Turkey for example," Mr Yeoh said.

In today's highly permeable markets, the butterfly effect is also a greater risk.

"As a result of events in recent years, business leaders are increasingly aware that local risks can be rapidly amplified into global ones, with widespread impact," he added.

"Companies have now built into their risk management and scenario planning the possibility of more extreme conditions, not just basing assumptions on an incremental change in conditions.

Additionally, board members have become much more engaged in the enterprise-risk planning process."

"Businesses have already made key operational moves to improve their organisational resilience," he said.

"To manage future disruptions, they have focused on changes to supply logistics and increasing contingency plans in supplier networks. For example, after the earthquake and tsunami in Japan, CEOs based in Asia-Pacific focused on improving their company's ability to react more quickly to a supply chain shock, seeking new locations for their operations and reinforcing their supply chain."