How companies assess risk has fundamentally changed, say corporate and litigation lawyers
Beginning with COVID-19, crises and disruptions – geopolitical uncertainty, the Ukraine war, supply chain issues, workplace upheaval, inflation, interest rates, energy transition - seem to be de rigueur. The upshot is that may be time to revisit organizations’ approach to long-term risk management.
“While the day-to-day focus will naturally remain on navigating the most pressing short-term priorities, the current succession of crises has become a huge distraction, and we need to take a deeper dive into the lessons learned from the pandemic if we hope to emerge stronger, better and more resilient in the long term,” says Clemens Mayr, a partner in McCarthy Tétrault LLP’s Montreal office. “And doing so goes to the fundamental role of the board, which is to be the conscience of the organization, help it deal with short-term crises and keep the long game in check.”
To this end, Mayr and his team have developed a non-exhaustive list of topics and issues relevant to long-term challenges.
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It’s important, Mayr says, to ensure that organizations make the most of the learning opportunity that a crisis presents.
“They should consider what was done well, what was not, what could have been done differently, what went right and what went wrong.”
Equally important is an examination of the organization’s response to external developments such as competitors’ and industry-wide initiatives, an inquiry into whether the board had the right information and whether there was appropriate engagement with shareholders and financial markets. Boards should also consider whether the crisis revealed succession plan flaws.
Looking forward, organizations must consider whether they fully understand global trends and market changes emanating from a crisis, changes to the company culture and their impact, and what can be done to ensure quicker, more efficient responses.
Critical to effective long-term risk management is whether changes brought on by a crisis have affected investment strategy, presented opportunities or challenges unique to the industry, call for strategic acquisitions or divestitures or resort to onshoring. Increased energy costs and coping with them may require contemplation or action as well, as does the use of robotics or automation as a response to the labour shortage.
Social license considerations come into play as well.
“These are distrusting times, and businesses must strengthen and generate trust,” Mayr says.
To that end, inquiries into stakeholders’ perceptions, focus, and attitude to ESG are critical, as is communication of the company’s plans. If Indigenous reconciliation impacts the company, is the organization doing enough to partner with First Nations? And perhaps most importantly, organizations must determine the extent to which shareholders are behind a move to support the wider community rather than focusing solely on corporate profits and shareholder returns.
To be sure, tending to these matters is more than a handful, especially in an era where much has changed in the process of risk management.
“The key difference is that we’ve all learned to be risk managers,” says Ken Jull, counsel at Gardiner Roberts LLP in Toronto where he conducts a diverse risk and compliance practice. “Five to ten years ago, most people were in the wilderness, but these days everyone has had to become a risk manager in terms of making decisions like whether to go to the office, whether to go out to restaurants, when and where to wear masks, and whether to get vaccinated.”
The universal exposure to risk, Jull adds, has wrought benefits.
“We’ve learned to do things like weighing probability against gravity in our personal lives, so it’s easier to apply it to the business environment.”
As Jull sees it, the greatest threat to business in the long and short-term comes from class actions.
“Where clients might not have to worry about exposure to government actions, they do need to pay attention to class actions because they are what drove compliance in the US for many years. And Canada is catching up, especially with regard to issues like price-fixing and environmental cases.”
As Jull sees it, two theories that are becoming influential in risk management of late should cause organizations to recalibrate.
“The first is that companies who want to manage risk must give equal voice to individuals lower in the hierarchy and encourage them to speak out, and the second is that we must stop assuming that all decisions are rational, careful and accurate, because there are many inputs, including behavioural inputs, that we don’t see or take into account in our decision-making.”