When the economy first hit a crisis in 2008, it introduced a level of uncertainty within the business world that has not quite faded since then. Four years ago, companies went through the same processes they normally implement during troughs in the economic cycle – they downsized staff, reduced their operations, and only invested money in a limited fashion. However, that did not save many companies, as previous downturns were shorter and not as severe as this one. Governance experts have worked with Deloitte to develop a list of twelve risk areas that boards should ensure that they consider in their discussion and strategy setting functions.

Global Economy: Keep your seatbelts fastened, continued turbulence ahead

A key indicator about the strength of the world-wide economy is the individual economies of Brazil, China, and India. In 2011 the growth of all of these economies slowed a considerable amount, leading some economists to believe that there could be a double-dip recession on the horizon. However, others believe that due to protective policies passed in the US and Europe that will be avoided.

Either way, economists all predict that if the economy does decline in the next year, the recession will have an even slower recovery than the one which began in 2008.  Any growth will be muted as well according to predictions. This uncertainty means that businesses need to be prepared for whatever the global economy throws their way.

Risk Oversight: Keeping risk and opportunity in balance

Since 2008, risk management and oversight has become a major topic in board rooms across the country and the globe. Processes are more robust and the strategic link to risks has been established in many situations. However, the Deloitte thought paper questions whether the cart has come before the horse. Many times companies are looking to eliminate all risks, which leads to closing the door on many opportunities. Growth can only occur when risks are taken strategically.

Strategy, Growth, Performance: How agile is your strategy?

Major economic measurements such as exchange rates, capital markets, and consumer confidence dynamically change. Strategic plans need to set out objectives that recognize the volatility of the economy in today’s environment and have the agility to change strategy according the dictation of what the markets are doing. The assumptions and numbers that are analyzed during the formation of strategy should be questioned to make sure there aren’t any inherent risks not being recognized.

Operational Management: A strategic role in operational management

The board needs to realize the value they can individually bring to a business by working with management on developing and diligently overseeing the formation and implementation of the strategy. Also, the board can investigate and support new strategies on an entity-wide level that can help foster success within the business.

Capital, Cash, Liquidity Management: Making the best use of cash in hand

When the credit crisis initially hit in 2008, credit markets essentially froze. It was very difficult for companies to finance their operations in typical fashion. As a reaction to this, many organizations have begun to hoard cash so they won’t be so dependent on credit markets. Boards should have strategic plans for the cash they have on hand and determine what amount of cash in the coffers will be enough for the organization to achieve its strategic goals.

Mergers and Acquisitions: When every company is “in play”

Since summer 2010, merger and acquisition activity has gone up in major economic markets and is thought to be what could potentially offset any slow growth within large organizations as we keep moving through 2012. In looking for an acquisition target, companies should consider the following:

  • Alignment of strategies between the parent and the potential subsidiary
  • The corporate culture of the two companies should be very similar
  • The financing of the transaction should be in order before the deal is sealed

Organizational Structure: Global, flexible, flat, and networked

Just 15 years ago, economies were focused primarily on the domestic economy. However, that is not a luxury many businesses can afford right now. Now, the workforce, marketing plans, corporate structures, and even entity-wide strategies have some sort of international emphasis. Companies need to be flexible enough to effectively utilize a diverse workforce and all of the different needs of those employees.

Companies are also becoming more flat, which means organizational structures are changing. This means that companies also need to be flexible enough to deal with time zone and legal entity differences.

Talent Management: Understanding the talent strategy, and risk continuum

A phrase that many companies say on a regular basis is that “People are our most important asset.” Talent management is an important part of strategy, because no organization can be as effective as it wants to be with inferior talent. Therefore human resource management is an integral part of any organization in an uncertain economy. Management should consider the following in their attempt to get the best talent possible:

  • Create a corporate culture where effective human resource management is emphasized
  • Have a strong code of conduct
  • Maintain, grow, and develop talent
  • Ensure that the human resource department is considered in strategy setting

Also, if people are really the most important asset of a company, they should be treated that way. In order to do this, their opinions should be taken into account.

Sustainability/Corporate Responsibility: An integral component of organizational strategy

Green is the new black. The portion of the population that wants to use green products is growing at a rapid pace. In terms of business to business sales, many organizations only want to buy green products, so they can market to their end users that they are selling a green product. Because of this, boards need to consider sustainability management as a part of strategy and not just a good marketing ploy, even though being seen as a green company can strengthen the reputation and competitiveness of a company.

Regulation and Compliance: The next wave of regulation

The rules of business are constantly changing. In fact, change is the only constant in business during this volatile era of business. This change isn’t cheap either; for example, the costs for foreign banks to comply with the US Foreign Account Tax Compliance Act that goes into effect in 2014 are going to be approximately $250 million. These companies are somewhat used to this burdensome compliance cost because of legislation like Dodd-Frank and Sarbanes-Oxley. In order to effectively handle these changes, organizations should look at the changes at a portfolio level to see if there is anything they can do to “kill two birds with one stone.”

Transparency in Corporate Governance: Telling it like it is

Ever since the financial scandals of the early 2000s; transparency has become even more important in terms of financial reporting. In order to increase transparency, some boards are having in-person meetings with key shareholders to get a pulse on what the shareholders want and so expectations can be set from management to stakeholders.

It is important that all communications are clear and understandable for it to have any affect. In short, as Deloitte says in the white paper, any communication should simple “tell it like it is.”

Board Success: The demands and expectations keep growing

Boards and organizations are being pulled in many directions. Regulators are giving increasingly strict standards to follow with less time allotted to follow them. Stakeholders are expecting growth consistent with what happened in the past. Customers are looking for good prices. Not all of those work together, and it is the role of the board to oversee that all goals and objectives of the entity are linked back to risk and strategy.

Download the full thought paper here

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ERM Enterprise Risk Management Initiative 2012-02-01