Interview: “Companies need to change how they deal with disruption and risk appetite”

Companies and their leaders have always had to deal with all sorts of risk. Why do we need to change our perspective now?

Robert Paffen: The latest PwC CEO Survey shows that 37% of German CEOs believe that their company will not be financially viable in ten years’ time if they do not change course. That’s seven percentage points more than in last year’s survey, and it’s getting ever closer to the global average of 42%. Companies absolutely need to change their attitudes to disruption and risk appetite to arrest this trend.

Marc Billeb: You also have to consider the fact that the risk environment has changed massively in the last few years. New technology, climate change and more extreme weather, changing regulations, and unexpected shifts in politics are creating new challenges for business. And the skills shortage, growing competition and increasing cybercrime are making an already precarious situation into a tinderbox of risk.

Paffen: Many of these risks are related to one another, so we need holistic approaches to manage them. This is why we’re urging executives not to look at them in isolation: these risks and all the ways they interact with each other need to be considered in full. It’s also the foundation of our three-phase approach

Being farsighted about risks presupposes that companies can identify them early enough. How can we achieve this?

Paffen: What is needed is a new way of looking at risk – one that enables risks to be identified, visualised and assessed at all levels. We look at four distinct dimensions: Macro risk, enterprise risk, resilience and crisis.

Macro risk refers primarily to the context that a company operates within – this means performing scenario-based modelling and analysis of issues such as geopolitics. Enterprise risk, meanwhile, looks at the company as a whole and how risks interact with each other – operational risk and compliance risk, for example. Resilience examines elements such as processes, control mechanisms and third-party risk management, focusing on the company’s ability to strengthen the processes that create value. Finally, crisis is all about the importance of being able to respond rapidly to events such as cyberattacks, pandemics or supply chain disruption – and there really are ways of preparing for them.

Billeb: It’s essential that companies anticipate risks and start seeing them as the rule, not the exception. This ultimately results in increased agility to identify and avoid risks at an early stage, and to learn from them. Using state-of-the-art technology and data analysis is essential to map risks comprehensively and to enable adequate response at pace. Companies that do these things will be able to identify opportunities as well as just managing risk better.

But won’t companies end up stagnating if they don’t take risks?

Paffen: Absolutely. This is where the “take risk” part of our approach comes in: companies need to integrate risk into their strategy and decision-making. Of course, this needs to be in line with their risk appetite, but transformation and competitiveness will ultimately only come about if companies can act quickly and take calculated risks.

Billeb: Better-quality data and validated data models are also very important: they facilitate strong decision-making and help to identify new insights.

How should leaders strike the right balance between stability and risk appetite?

Paffen: Implementing structured risk management frameworks is a tried-and-tested approach. These lay the foundations for systematically identifying, assessing and managing potential risks.

Billeb: Leaders should drive continuous development, optimisation and validation of their risk frameworks and controls. For integrated response to and management of risks, it’s important that leaders work together. CFOs will see different risks and opportunities from CTOs, for example, so cross-functional collaboration is essential.

Which technologies can help leaders to do this?

Paffen: Technologies such as analytical AI enable companies to gain deeper insights, refine processes and build trust in new business models. They also help to break down complexity and integrate risk into decision-making, which leads to better and quicker decisions.

Billeb: Setting up intelligent early warning systems to spot threats is also important. Alongside this, reconfiguring risk assessment and reporting enables companies to focus on the most pressing risks, increase risk coverage and avoid blind spots.

What role does corporate culture play when it comes to working with risk, and what can leaders do to promote a risk-aware culture?

Paffen: Corporate culture is fundamental to how a company handles risk. Leaders need to promote clear and open dialogue around risks and errors – this is the only way to create a culture that considers risk an integral part of the business instead of something that must be avoided at all costs.

Billeb: To promote a risk-aware culture, executives should lead by example and demonstrate risk awareness in their own actions. This means openly discussing risks, learning from mistakes, and celebrating successes achieved by taking calculated risks.