Understanding the 2011 Top Global Risks

Earlier this year, the World Economic Forum established a Risk Response Network ("RRN") to facilitate dialogue among global leaders about the most important risks impacting our environment and economy. Kevin Steinberg, Chief Operating Officer, World Economic Forum USA, and Head of the Risk Response Network provided the following thoughts on the goals of the RRN. "Throughout the extreme shocks of recent years, both public and private sector leaders have been struggling to avoid collapse and keep the economy afloat. The World Economic Forum is launching the Risk Response Network: an umbrella of projects and initiatives all designed to help global leaders better understand, prepare for and respond to risk.”

With the launch of this new initiative, the World Economic Forum published a report on the most critical global risks that must be addressed in 2011. This report draws upon a risk perception survey of 580 global leaders, 18 risk analysis workshops and 50 risk expert consultations resulting in an assessment of 37 global risks. The resulting analysis is very intriguing and represents a true opportunity to begin addressing risks in a more proactive manner.

Doubt in Davos

The mood in the resort town of Davos, Switzerland is muted this week as business leaders discuss the coming wave of regulation at the World Economic Forum.  The primary concern is that regulatory reform will not be even-handed leading to greater opportunities for regulatory arbitrage.  That concern coupled with increasing political risk in emerging markets such as China is cause for considerable doubt in a quick economic recovery. Here is what The New York Times is reporting this morning.

Global business leaders warned Western governments on Wednesday that a populist crackdown on the financial industry could crimp a fragile recovery from the worst recession since the 1930s. The worried response to U.S. President Barack Obama's plans to curb big banks and a British assault on bankers' pay came as 2,500 business leaders and policy makers met at the World Economic Forum in the Swiss ski resort of Davos.

Surveys produced for the annual conference showed global economic confidence on the rise after deep gloom in 2009 and a cautious return to hiring, especially in emerging markets.  But the specter of uncoordinated, heavy-handed regulation and government intervention in the economy was the biggest cloud on many business leaders' horizon. Uncertainties over whether China will rein in its feverish pace of growth and concerns about how Greece will tackle its debt crisis also weighed. Standard Chartered bank CEO Peter Sands said there was a growing risk that fragmented regulatory initiatives would "create enormous amounts of complexity" and encourage financial companies to arbitrage among regulators.

Is your company ready for the potential regulatory tsunami?  Wheelhouse Advisors can help you prepare.  To learn more, visit www.WheelhouseAdvisors.com.

Risk Management Myopia

In many different experiments,

research has found that people exhibit loss aversion by

avoiding short-term expenditures, even though they

could actually result in significant long-term gains. More

specifically, people often miss an opportunity to mitigate

risks by not acting with a long-term perspective and by

not taking interdependencies into accoun

 

In this year's Global Risks report, the World Economic Forum provided many interesting insights about emerging risks across the globe.  In addition, the report provided research into how risks are managed in various organizations.  One particular study examined the common myopic view of risks and the resulting behavior.  Here is what the report concluded.

In many different experiments, research has found that people exhibit loss aversion by avoiding short-term expenditures, even though they could actually result in significant long-term gains. More specifically, people often miss an opportunity to mitigate risks by not acting with a long-term perspective and by not taking interdependencies into account.

Individuals and corporations have short time horizons when planning for the future so they may not fully weigh the long-term benefits of investing today in loss reduction measures that could benefit them in the future. The upfront costs of mitigation loom disproportionately large relative to the delayed expected benefits over time. Applied to businesses, short-term horizons can translate into a NIMTOF perspective (Not in My Term of Office).

Current performance metrics and compensation systems are driving this myopic approach to the detriment of companies' long term viability and the economy at large.  Looks like it is time for some vision correction in risk management.