The sixth sense of risk
by Tom Teixeira, Emily Channon
October 2018
Building foresight to navigate the emerging risk landscape

Today’s executives face an increasingly uncertain risk landscape. The business environment exposes organizations to greater vulnerabilities, more complex dependencies and less predictable competition than ever before. At the same time there is intensifying pressure and expectation on the CEO’s ability to lead the business to success by measured risk-taking, while avoiding reputational damage. With a relentless stream of emerging risks and increasing ambiguity of “black swan” events, executives must adapt their leadership and transform their approaches to risk management. Executives now require a “sixth sense” of risk, to provide intuition into the emerging risk landscape and enable their organizations to sense and respond to emerging risk before devastating events are realized. This can be achieved through a proactive approach to risk management.

Evolution of the risk landscape

At its core, proactive risk management is identifying emerging risks early, determining how they should be prioritized, and then responding to them quickly and effectively. The integration of this approach is facilitated by a shift in risk management from a reactive “measure and manage” approach to an anticipatory “sense and respond” approach, which utilizes organization-wide engagement to ensure a dynamic response to risk. This need for change follows the evolution of the risk landscape in three fundamental areas: the era of innovation, evolving dependencies and increasing stakeholder expectations.

  • Era of innovation – As innovation transforms organizations, technology and markets, there are ever-changing paths to accomplishing goals, tools with which to achieve them and developing opportunities for competitive advantage. To ensure value generation in the face of this, organizations must expand into previously unexplored business sectors and technologies, thus exposing themselves to a potentially vast array of unfamiliar risks.
  • Evolving dependencies – As leading organizations learn to embrace complexity instead of trying to simplify the complicated, they acknowledge increased dependencies: both internal, between business functions, and external, from customers. The consequence of such internal dependencies is that risks which were previously considered immaterial now pose a serious threat across the entire organization. Combining this with increased customer dependencies, wherein society has become accustomed to high quality-on-demand services, loss of function or reputation can swiftly lead to loss of market share.
  • Stakeholder expectations – Increasing scrutiny, from both internal and external sources, means executives are expected to deliver more successful results than ever before. In addition, society places pressure on organizations to accept accountability for any actions perceived to be related to them, ranging from the personal activities of senior leadership members to scandals involving related third parties. This, combined with the viral nature of modern media, means organizations must be seen to respond immediately following an incident or face reputational backlash.

The result of this evolution is that organizations must accept that they are complex rather than complicated. A complicated system is similar to an intricate machine; although the relationships between cause and effect may be difficult to understand, they can ultimately be explained. A complex system is built on the interconnectivity of multiple contributors, meaning these relationships are no longer as definitive and outcomes are not always certain. Thus, executives should accept that their organizations may struggle to fully rationalize or quantify many of the emerging risks they face. However, these risks can still be managed effectively through a proactive approach.

The CEO can now only afford one significant failure, so they must ensure a leadership style which enables their organization to sense and respond to these emerging risks.