Only 21% of execs felt ready for a major disruptive event pre-COVID
EY survey finds that executive teams did not feel adequately prepared for a major crisis, the consequences of which are playing out now
According to the Global Board Risk Survey that Ernst & Young LLP (EY US) conducted with the participation of 500 global board members and chief executive officers (CEOs) not with EY, only 21% of board members believed their organizations were very prepared to respond to an adverse risk event from a planning, communications, recovery and resilience standpoint, before the COVID-19 outbreak.
With COVID-19 now posing critical challenges for businesses, many organizations are experiencing vulnerabilities related to their human capital, significant fluctuations in product demand and heavy supply chain disruption from the affected areas.
Unpredictable events and uncertainty related to the pandemic continue to expand the scope of risks, highlighting the heightened need for crisis management planning to build strategic, operational and financial resiliency across the business.
"COVID-19 began as a public health crisis; however, it has rapidly evolved into a significant global economic challenge as well, encompassing nearly every layer of organizations from human capital to supply chains," says Steve Klemash, Partner, Ernst & Young LLP and the EY Americas Leader of the Center for Board Matters. "While participants responded to this survey before the COVID-19 pandemic began, it underscores the importance for organizations to be prepared for these kinds of events. Now, more than ever, it is imperative for boards and directors to adopt a new risk mindset and take a future-first risk approach so that they are prepared for even the most unpredictable issue."
Gaping holes in understanding risk
The research finds major gaps in risk reporting, with under 20% of board members extremely confident in risk reporting from management on a range of significant issues, including business megatrends, new and emerging business models and culture, and conduct-related risks.
Just 21% are very satisfied with the accuracy, completeness and breadth of the risk reports they do receive.
Cutting in the other direction, boards have also not been adequately communicating their reporting requirements to management, as only 26% strongly agree that they have done so.
This goes some way to explain why some have been caught out so drastically when it comes to supply chain resiliency, as adequate preparation systems are not in place due to poor risk analysis.
Nearly half of board members surveyed cite unfavourable economic conditions as the most important risk category, with those that sit on boards of US companies ranking geopolitical risks and people issues as a joint second. Cyber attacks and data breaches are also putting immense pressure on boards, with 48% of board members believing these will more than moderately impact their businesses over the next 12 months.
Risk and strategic value
While nearly three-quarters of board members believe their organization's strategy is aligned with its risk appetite, the survey reveals opportunities to adjust this to be more future-fit and turn risk into strategic value. Less than a quarter of board members are very satisfied with their effectiveness in overseeing changes to the risk landscape and adjusting the organization's risk appetite accordingly.
With only 40% of board members satisfied with the management of new and emerging risks—citing talent and skill sets as the top obstacles—boards have the opportunity to challenge how the organization's talent strategy is enabling the transformation of enterprise risk management (ERM). Similar views also exist within the financial services industry, where 42% of directors believe that their firms are only somewhat effective in managing atypical or emerging risks.
Improving board room capabilities
The survey results also suggest the need to upskill boards, since only 64% of board members believe their composition and represented skill sets are adequate for overseeing the organization's risk management.
Given the COVID-19 outbreak and its impact on organizations across all industries, building risk resiliency is even more important. EY experts recommend that boards should work with management to advance their risk oversight by:
- Reprioritizing top risks to keep pace with market disruption – encourage stronger alignment and more rigorous oversight of key emerging risks
- Turning risk into strategic value – look at "upside" opportunities that risks can provide to achieve performance management goals and strategy objectives by leveraging external data sources in risk identification and improving monitori ng of risk responses.
- Redefining risk reporting to reflect the dynamic risk landscape – adjust risk reporting to reflect the new risk landscape, including new reporting on emerging risks, and ask for more predictive insights
- Evolving the board's role in ERM – focus on emerging and existential risks on the board agenda, and utilize external experts to upskill the board, advise on specialized risks, and stay on top of megatrends to identify risks and uncover opportunities