Against a backdrop of geopolitical uncertainty and market unpredictability, business risk appears to be more acute than at any time in living memory. But there are ways for companies to manage the current environment and even turn it to their advantage. Agility, flexibility and vision can all make a significant difference, while the latest advances in  technology and data mean that businesses are arguably better equipped than ever to understand the present and plan for the future.​

MARKETS

This year marks 40 years since the US economist John Kenneth Galbraith published The Age of Uncertainty. Writing after the oil shock of 1973, Galbraith described a destabilised world that rendered established political and economic ideas increasingly redundant.

The soaring cost of oil at that time triggered a period of rising prices and slowing growth – stagflation – a heady cocktail that raised questions about the very direction of economic policy. Galbraith concentrated on the US but the sense of malaise was widespread. In the UK, for example, the government was forced to borrow from the IMF just a year before the book was published. 

Uncertain times

Yet from the vantage point of 2017, the 1970s were a time of relative tranquillity, according to US economist Barry Eichengreen. With a nod to Galbraith, Eichengreen describes today as ‘the age of hyper-uncertainty’, suggesting that the Middle East is more volatile, while the rise of China and other emerging markets has made the world economy more interconnected and, arguably, harder to predict. Terrorist attacks in major Western cities have become alarmingly regular, disrupting business and travel. And the gulf between rich and poor has provoked a backlash against political and economic liberalism, in favour of populism and nationalism. 

Add in cyber attacks, regulatory pressures, increased media scrutiny, the rise of the internet, Brexit and US political instability and the world does indeed appear high risk. 

Yet sitting out the turmoil is not an option for businesses. 

So how do companies navigate these choppy waters while remaining dynamic?

A question of confidence

Reg Hankey, chief executive of British leather producer Pittards, believes the world is more unpredictable than at any time in his 40-year career.“You would be naive if you ignored the fact that we live in a very risky world. The political climate is very complicated globally and there is almost nowhere in the world that is unaffected by that. We have to dig deep to understand the risks to our business,” he says.

Hankey is not alone. A global survey of chief executives, conducted this year by consultancy KPMG, found fewer than two in three felt confident about prospects for global economic growth over the next three years – down from 80 per cent in 2016. Half of those surveyed said political events had a greater impact on their business now than they had for many years. In response, they have become involved in more scenario planning and have taken on specialists in geopolitical risk.

Yet there is another perspective – that people are always inclined to see today’s risks as extraordinary and that the current climate is relatively benign. 

 

MARKETS

A question

of risk

A question
of risk

Look behind you

A decade after the start of the financial crisis, for example, the world economy is in its eighth successive year of growth. The IMF recently upgraded its forecasts and expects that expansion will strengthen slightly in 2018. 

The US and the UK are near full employment, the Eurozone economy is recovering fast and China seems to be beating expectations month after month. Stock markets are at nominal record highs and living standards in the West remain far better than 40 years ago.

Roger Farmer, research director for macroeconomics at the National Institute of Economic and Social Research, says proponents of the hyper-uncertainty idea are glossing over the past, when the world was gripped by the terror of the Cold War. 

“In 1977 the Soviet Union was a major superpower, Europe was divided into communist and free market blocks, Iran was entering a period of turmoil that would lead in 1979 to the Iranian revolution and the US was experiencing a period of stagflation caused, in part, by the OPEC oil cartel. The world has always been uncertain. That is as true today as it was in 1977 – no more, no less,” he claims. 

But are we more risk averse, or at least risk conscious, than in the past? Armed with more information than previous generations, we are perhaps better able to identify and manage risks.

This year marks 40 years since the US economist John Kenneth Galbraith published The Age of Uncertainty. Writing after the oil shock of 1973, Galbraith described a destabilised world that rendered established political and economic ideas increasingly redundant.

The soaring cost of oil at that time triggered a period of rising prices and slowing growth – stagflation – a heady cocktail that raised questions about the very direction of economic policy. Galbraith concentrated on the US but the sense of malaise was widespread. In the UK, for example, the government was forced to borrow from the IMF just a year before the book was published. 

Uncertain times

Yet from the vantage point of 2017, the 1970s were a time of relative tranquillity, according to US economist Barry Eichengreen. With a nod to Galbraith, Eichengreen describes today as ‘the age of hyper-uncertainty’, suggesting that the Middle East is more volatile, while the rise of China and other emerging markets has made the world economy more interconnected and, arguably, harder to predict. Terrorist attacks in major Western cities have become alarmingly regular, disrupting business and travel. And the gulf between rich and poor has provoked a backlash against political and economic liberalism, in favour of populism and nationalism. 

Add in cyber attacks, regulatory pressures, increased media scrutiny, the rise of the internet, Brexit and US political instability and the world does indeed appear high risk. 

Yet sitting out the turmoil is not an option for businesses. 

So how do companies navigate these choppy waters while remaining dynamic?

Against a backdrop of geopolitical uncertainty and market unpredictability, business risk appears to be more acute than at any time in living memory. But there are ways for companies to manage the current environment and even turn it to their advantage. Agility, flexibility and vision can all make a significant difference, while the latest advances in  technology and data mean that businesses are arguably better equipped than ever to understand the present and plan for the future.​

Today is ‘the age of hyper-uncertainty’, where the Middle East is more volatile, while the rise of China and other emerging markets has made the world economy more interconnected and, arguably, harder to predict”​

Despite increased volatility in world markets over recent times, I believe entrepreneurs with big ideas are in a much better position now than before to take calculated risks”

Risk society

Back in the 1970s, Galbraith argued that the established ideas of the 19th century – capitalism and socialism – were made increasingly redundant by the new uncertainties he identified. A decade later, sociologists Ulrich Beck and Anthony Giddens argued that risk, and people’s exposure to it, was emerging as a new way of defining people in society. 

They suggested that society had become highly complex, giving rise to man-made risks, including environmental disasters, that were distinctive to modern life. This “risk society” had partly replaced, or could be layered onto, long-established social divisions, they said.

Iain Wilkinson, professor of sociology at the University of Kent, is sceptical about the idea of a risk society, however. 

“For most of us, life is safer than ever but some people may be more at risk as society’s benefits are shared out less equally,” he argues. “The pace of modern society may also make us more risk conscious. If you’re going to say we are becoming more anxious or risk conscious, that hinges on when and where we are comparing ourselves to. On many measures we are living in the best of times, if you look at most health measures and the type of democracy we enjoy.

“It seems to be an all-too-human trait to look at the past as a world we have lost or something of value that has gone. We live in times where the speed of change is greater, when we compare ourselves to most periods of the past. The speeding up of information exchange can also be disorienting,” he adds. 

Information is power

Too much information may be unsettling but Sanjeev Gupta, executive chairman of steel company Liberty House, argues that business has never been better equipped to manage turbulent times.

“Despite increased volatility in world markets over recent times, I believe entrepreneurs with big ideas are in a much better position now than before to take calculated risks. With improved technology, better access to comprehensive data, huge improvements in communications and easier movement to see opportunities first-hand, we can weigh up risks more effectively and make better-informed decisions,” he says. 

Liberty House has expanded even as the European steel industry has struggled and external risks have appeared to increase. Gupta says he can take a long-term view, as Liberty House is privately owned. Over time, he believes, the business will grow as use of recycled scrap metal expands and governments increasingly favour companies using renewable energy. Liberty House is now looking to the US and France for new opportunities. These countries may have new, very different leaders but both presidents have indicated they will introduce legislation that supports industry. 

Competitive advantage

Pittards’ Hankey also sees opportunities amid the turbulence. Britain’s departure from the EU looms over the UK economy but sterling’s post-referendum decline against the dollar has opened up opportunities that were out of reach when the pound hovered around $1.60. Chinese leather priced in dollars is now more expensive in the UK, while Pittards’ is cheaper. Hankey concedes that the pound’s fall is partly due to fears about the post-Brexit UK economy but he says it is up to Pittards to manage the risk.

“It’s not all doom and gloom. We have to understand what is going on and adapt our business faster. If people have a product they want to make, they can send the plans to China, but they can also have a discussion with us about it and we are just a couple of hours down the road. We can do smaller, quicker runs. The currency has made us competitive again,” he says. 

A global survey of chief executives found that fewer than two in three felt confident about prospects for global economic growth over the next three years – down from 80 per cent in 2016”​

The right balance

Companies rely on formal processes as well as instinct and entrepreneurial spirits to manage risk and opportunity. Britain’s Financial Reporting Council, for example, has increased requirements for board members to consider risk. The Chairmen’s Forum, a governance body, has called for more consideration of risk during “one of the most turbulent times we have seen for years”.

But many companies feel that there needs to be a balance between board-related governance and on-the-ground risk management. Otherwise, risk management can become more about box-ticking than assessing genuine challenges within the business. “It’s very difficult to make the balance between risk and opportunity formal. The more you can focus on detail and minutiae, the better able you are to make decisions in respect of risk and then make sensible investments,” says Tim Martin, founder and chairman of pub chain JD Wetherspoon.

Pay attention

Addressing business risk will clearly vary according to individual companies’ size, shape and sector. But most would agree that rigorous attention to detail is an essential step in the risk management process. 

As to whether the world is riskier today than in the past, many business leaders believe that it is and perception can be as powerful as reality. Certainly, information flows have increased exponentially so companies are more aware than ever of potential dangers. 

But one person’s risk can be another’s opening. And perhaps the best businesses are alive to their changing environment and manage their way through.

As Gupta at Liberty House says: “There will always be risk in business. It’s within the realms of risk that we find opportunities.” 

Back to articles

It’s not all doom and gloom. We have to understand what is going on and adapt our business faster”​

There needs to be a balance between board-related governance and on-the-ground risk management”​

A question of confidence

Reg Hankey, chief executive of British leather producer Pittards, believes the world is more unpredictable than at any time in his 40-year career.“You would be naive if you ignored the fact that we live in a very risky world. The political climate is very complicated globally and there is almost nowhere in the world that is unaffected by that. We have to dig deep to understand the risks to our business,” he says.

Hankey is not alone. A global survey of chief executives, conducted this year by consultancy KPMG, found fewer than two in three felt confident about prospects for global economic growth over the next three years – down from 80 per cent in 2016. Half of those surveyed said political events had a greater impact on their business now than they had for many years. In response, they have become involved in more scenario planning and have taken on specialists in geopolitical risk.

Yet there is another perspective – that people are always inclined to see today’s risks as extraordinary and that the current climate is relatively benign. 

Today is ‘the age of hyper-uncertainty’, where the Middle East is more volatile, while the rise of China and other emerging markets has made the world economy more interconnected and, arguably, harder to predict”​

Look behind you

A decade after the start of the financial crisis, for example, the world economy is in its eighth successive year of growth. The IMF recently upgraded its forecasts and expects that expansion will strengthen slightly in 2018. 

The US and the UK are near full employment, the Eurozone economy is recovering fast and China seems to be beating expectations month after month. Stock markets are at nominal record highs and living standards in the West remain far better than 40 years ago.

Roger Farmer, research director for macroeconomics at the National Institute of Economic and Social Research, says proponents of the hyper-uncertainty idea are glossing over the past, when the world was gripped by the terror of the Cold War. 

“In 1977 the Soviet Union was a major superpower, Europe was divided into communist and free market blocks, Iran was entering a period of turmoil that would lead in 1979 to the Iranian revolution and the US was experiencing a period of stagflation caused, in part, by the OPEC oil cartel. The world has always been uncertain. That is as true today as it was in 1977 – no more, no less,” he claims. 

But are we more risk averse, or at least risk conscious, than in the past? Armed with more information than previous generations, we are perhaps better able to identify and manage risks.

Despite increased volatility in world markets over recent times, I believe entrepreneurs with big ideas are in a much better position now than before to take calculated risks”​

Risk society

Back in the 1970s, Galbraith argued that the established ideas of the 19th century – capitalism and socialism – were made increasingly redundant by the new uncertainties he identified. A decade later, sociologists Ulrich Beck and Anthony Giddens argued that risk, and people’s exposure to it, was emerging as a new way of defining people in society. 

They suggested that society had become highly complex, giving rise to man-made risks, including environmental disasters, that were distinctive to modern life. This “risk society” had partly replaced, or could be layered onto, long-established social divisions, they said.

Iain Wilkinson, professor of sociology at the University of Kent, is sceptical about the idea of a risk society, however. 

“For most of us, life is safer than ever but some people may be more at risk as society’s benefits are shared out less equally,” he argues. “The pace of modern society may also make us more risk conscious. If you’re going to say we are becoming more anxious or risk conscious, that hinges on when and where we are comparing ourselves to. On many measures we are living in the best of times, if you look at most health measures and the type of democracy we enjoy.

“It seems to be an all-too-human trait to look at the past as a world we have lost or something of value that has gone. We live in times where the speed of change is greater, when we compare ourselves to most periods of the past. The speeding up of information exchange can also be disorienting,” he adds. 

Information is power

Too much information may be unsettling but Sanjeev Gupta, executive chairman of steel company Liberty House, argues that business has never been better equipped to manage turbulent times.

“Despite increased volatility in world markets over recent times, I believe entrepreneurs with big ideas are in a much better position now than before to take calculated risks. With improved technology, better access to comprehensive data, huge improvements in communications and easier movement to see opportunities first-hand, we can weigh up risks more effectively and make better-informed decisions,” he says. 

Liberty House has expanded even as the European steel industry has struggled and external risks have appeared to increase. Gupta says he can take a long-term view, as Liberty House is privately owned. Over time, he believes, the business will grow as use of recycled scrap metal expands and governments increasingly favour companies using renewable energy. Liberty House is now looking to the US and France for new opportunities. These countries may have new, very different leaders but both presidents have indicated they will introduce legislation that supports industry. 

A global survey of chief executives found that fewer than two in three felt confident about prospects for global economic growth over the next three years – down from 80 per cent in 2016”​

Competitive advantage

Pittards’ Hankey also sees opportunities amid the turbulence. Britain’s departure from the EU looms over the UK economy but sterling’s post-referendum decline against the dollar has opened up opportunities that were out of reach when the pound hovered around $1.60. Chinese leather priced in dollars is now more expensive in the UK, while Pittards’ is cheaper. Hankey concedes that the pound’s fall is partly due to fears about the post-Brexit UK economy but he says it is up to Pittards to manage the risk.

“It’s not all doom and gloom. We have to understand what is going on and adapt our business faster. If people have a product they want to make, they can send the plans to China, but they can also have a discussion with us about it and we are just a couple of hours down the road. We can do smaller, quicker runs. The currency has made us competitive again,” he says. 

It’s not all doom and gloom. We have to understand what is going on and adapt our business faster”​

The right balance

Companies rely on formal processes as well as instinct and entrepreneurial spirits to manage risk and opportunity. Britain’s Financial Reporting Council, for example, has increased requirements for board members to consider risk. The Chairmen’s Forum, a governance body, has called for more consideration of risk during “one of the most turbulent times we have seen for years”.

But many companies feel that there needs to be a balance between board-related governance and on-the-ground risk management. Otherwise, risk management can become more about box-ticking than assessing genuine challenges within the business. “It’s very difficult to make the balance between risk and opportunity formal. The more you can focus on detail and minutiae, the better able you are to make decisions in respect of risk and then make sensible investments,” says Tim Martin, founder and chairman of pub chain JD Wetherspoon.

Pay attention

Addressing business risk will clearly vary according to individual companies’ size, shape and sector. But most would agree that rigorous attention to detail is an essential step in the risk management process. 

As to whether the world is riskier today than in the past, many business leaders believe that it is and perception can be as powerful as reality. Certainly, information flows have increased exponentially so companies are more aware than ever of potential dangers. 

But one person’s risk can be another’s opening. And perhaps the best businesses are alive to their changing environment and manage their way through.

As Gupta at Liberty House says: “There will always be risk in business. It’s within the realms of risk that we find opportunities.” 

Back to articles

There needs to be a balance between board-related governance and on-the-ground risk management”​

Browse all articles  
Bridgepoint  |  The Point  |  November 2017  |  Issue 32