With the growth of the Internet and globalisation businesses face new operational risks every day. Liability, property damage and weather (despite a significant increase in European weather-related claims) are no longer the sole, or even the major source of potential risk. They have now been superseded by at least five identifiable factors.
Corporate governance and regulatory risk will be a dominant theme throughout the decade. The Basel Committee on Banking Supervision is re-writing the global rules for capital sufficiency and a working draft is available. The committee is reviewing three areas: -
Due to be implemented in 2004, the effect of the Basel rules will be profound. They will introduce a significantly more stringent regime to the world's banks and financial institutions, and in due course all of their customers. The object is to increase the confidence of public in the global banking system.
Reputation and corporate image are significant assets for any business and provide a key impetus for success. They are also among the most fragile of resources that must be nurtured and can easily be damaged by a single event.
Gerald Ratner's unguarded statement at the UK Institute of Directors about the quality of the jewellery his company sold was sufficient to destroy his business - the share price falling from 389 pence to 12 pence in three months. Similarly the remark by Glen Hoddle (then manager of the English soccer team) in a TV interview, giving the impression that 'handicapped people' had received a judgement from God, produced an adverse public reaction that led to his resignation.
Corporate image will become an increasingly sensitive issue and the Federation of European Risk Management Associations (FERMA) considers image to be one of the most significant corporate risks.
The risk of product recall will increase significantly, particularly in the retail environment. High profile cases such as Coca-Cola in Belgium and France (total product recall); and Firestone / Ford in the US, have highlighted the potential damage to the brand. If there is potential bodily harm, the impact is even more serious, involving litigation, loss of sales revenue, replacement and damage to the brand.
The ability to communicate risk issues effectively will become a key competence. The Bridgestone - Firestone / Ford fiasco is a classic case in this regard. These companies apparently failed to communicate in advance some of their critical risks and risk decisions, making less believable their subsequent denials, protestations and counter-claims after the fact. The result was a lack of credibility, loss of market share, and high profile litigation.
The risk of litigation is increasing and is a global trend - rather than, as often pictured in the past, a US phenomenon. The era of blaming and claiming is definitely on us, coupled with the 'deep pocket syndrome' - making the party that can afford to pay bear the biggest burden.
This trend will be accelerated by changing public and governmental attitudes to: -
Already, claims for medical negligence against the UK National Health Service have increased from £38 million to £400 million in three years.
Cyber risk and technology failure are well documented and we can be certain that threats from hackers and increasingly sophisticated viruses will multiply. Incidents of viruses" targeted specifically at one company and cyber extortion will become increasingly commonplace, coupled with multi-media liability and cyber libel. The insurance industry is already developing products specifically tailored for these contingencies.
Environmental risk will continue to have a high profile, especially in the public perception. The 'greening' of business will increase significantly. The use of Environmental Audits will grow and suppliers may be excluded from sectors of business if they are considered to be deficient. Exxon has been pilloried for not investing in renewable energy and Tesco was excluded from a recently published 'environmentally ethical' list. There may even be refusals to supply if the buying organisation is deemed to be unsuitable (for instance the nuclear industry or animal breeding for research).
Shareholder value and the risk of an unforgiving stock market will drive organisations to become more risk averse. The need for small and medium businesses to prove that they are 'worthy' of business may be a significant burden.
Invitations to tender will become increasingly prescriptive. Unless the potential supplier can put the appropriate 'ticks in the boxes' - for ISO9000, IIP, Information Security Policy, Data Protection Policy etc., - they will be denied the opportunity to bid.
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