Redefining risk in a changing world: Perspectives from PwC's 19th Annual Global CEO Survey

Authors: Marco Amitrano and Peter Claude

 

The pessimist sees difficulty in every opportunity. The optimist sees the opportunity in every difficulty. —Winston Churchill

 

Chances are, there’s a feeling in your gut shared by 67% of CEOs in PwC’s 19th Annual Global CEO Survey: that there are more threats to business today than there were three years ago.

A quick scan of the business media would validate this sixth sense. Recent Economist covers described “Brazil’s Fall,” suggested “How to Manage the Migrant Crisis,” wondered “Who’s Afraid of Cheap Oil?” and asked whether central bankers were “Out of Ammo?” – all in the first eight weeks of 2016.

Dr. Ahmed Heikal, Chairman of Qalaa Holdings, an Egyptian investment company with a footprint across the Middle East and Africa, says: “So, globally, I think the world will see, in the medium-term, meaning the next five years, lower growth and a very challenged period of time with low commodity prices – and people need to adjust to those realities.”

Those are grim realities. Still, 14% of the CEOs in our survey not only believe there are more threats to business today, but also are “very confident” of their growth prospects. These CEOs aren’t a paradox; rather they’re a special group of leaders, whom we call opportunists, who have found the upside to risk. They see the risks mounting but they’ve taken the steps they need to position their companies to grow. Indeed, these opportunists are more likely than other CEOs to also believe there are more opportunities today than there were three years ago.

Distinguishing opportunities from threats is not as easy as it sounds. Think, for example, of the Affordable Care Act of 2010, which provided a wealth of both opportunities and threats across the US health care system, which the PwC Health Research Institute describes as a US$ 2.8 trillion value chain. Some insurers saw opportunity and rushed into the nascent private health-insurance exchange market that would serve a new group of consumers. After losses quickly mounted, several insurers have since announced their intent to exit the market.

Insurers with a more robust risk identification and assessment protocol might have looked closer at the penalties consumers faced for not signing up. It turned out those penalties were too low to prompt healthy people to enroll. The government wasn’t in position to do more to force the issue. So the pool of enrollees wasn’t as healthy as the insurers expected given the premiums they collected.

Opportunists are likely to have that kind of strategic risk protocol in place. But that doesn’t make them defensive. There’s evidence they’re taking bold action, despite the threats they see to their business. For example, they are much more likely than other CEOs to be increasing headcount, by a whopping 70% to 48% margin. They are also more likely to be planning M&A activity in 2016. 

What gives opportunist CEOs such confidence to invest in M&A and headcount in a time of rising threats?

For one thing, opportunists feel they have a mandate from a broader set of stakeholders than just investors. So they’re less concerned about stock market volatility than the average CEO and more likely to prioritize long-term over short-term profitability. 

While considering needs of the broader stakeholder community is not an entirely new concept these days, there has been an evolution both in stakeholders’ needs and in how stakeholder engagement can provide value to the CEO and the company. “Like any company we clearly have a number of stakeholders,” says Dirk Van de Put, CEO of McCain Foods Ltd., a Canada-based food multi-national. “I would say the needs and the wants of those stakeholders have recently been evolving rapidly. We’ve come to the conclusion that while our purpose remains the same, as we say with good food, good business and good farming, it is very different today in terms of exactly what that means compared to 50 years ago when the company was founded.”

Investors and other providers of capital remain critically important stakeholders. But other voices are multiplying in number and raising the volume with which they speak. Regulators and communities, to name just two other stakeholders, have increasingly legitimate claims to a CEO’s attention. With the prevalence of social media and the resulting potential to rapidly pressure a company, customers arguably have more influence on the bottom line today than ever before. Finally, changes in the labor pool, both in working style and approach and in which skill sets are in high demand, create greater volatility in the employee base which CEOs must manage. 

The employee base also comes with new expectations. “I speak to our new recruits every year,” Brian Moynihan, CEO and Chairman of Bank of America says, “and they have an intense interest in working for a good company, defined as one that is doing a great job for all its stakeholders. They are very astute, and will call you out on those issues more than in the past, which is great. So our younger employees are driven to be successful, but they’re also here to do things that make society better. It’s critical for us to recognize that demand and then to shape the company around it.”

Smart businesses are turning their attention to understand what each of those stakeholders want to know. Opportunists are more likely to be changing how they measure total success, by reporting more non-financial measures and engaging with stakeholders to increase the relevance of, and trust in, their company. They’re taking systematic approaches to understanding what’s important to each stakeholder group, and developing measures and reports that are very specific to those groups. “Still today I believe, not just in Kesko but in all big companies, these traditional financial measures have an extremely important role,” says Mikko Helander, CEO of Kesko Corporation, a Finnish retailer. “But at the same time, we are also developing and creating new measures to understand better not only how well we have succeeded in satisfying consumers, but also how well we have succeeded in satisfying all other stakeholders who are important for Kesko.”

A stakeholder mindset leads to performance gains in both financial and non-financial measures. One study identified companies that had adopted a “high sustainability” culture, adopting a coherent corporate policies related to stakeholders and the environment. These firms were found to be “distinct in their stakeholder engagement model in that … they are more focused on understanding the needs of their stakeholders, making investments in managing these relationships, and reporting internally and externally on the quality of their stakeholder relationships.” High sustainability companies, it should be noted, also have a higher return-on-assets and return-on-equity over the long-term.[1]

One reason for this link is that engaging with stakeholders provides a more rounded picture of current and potential change, and of the potential threats and opportunities that change represents. CEOs who have their stakeholder radars turned on get a better sense of the changes that are coming, and of opportunities to convert change into manageable risks and affordable opportunities. As a result, their management and companies are more agile when change is imminent and can implement advantageous course corrections before they are overcome by the wave of change, gaining an advantage over the competition.

Listening carefully to different customers is crucial to getting strategic risk decisions right, for example. US pharmacy chain CVS announced it would stop selling cigarettes in early 2014, for example, because of an important risk-benefit calculus. This was no mere product mix decision: some projected US$ 2 billion in lost sales. But CVS saw the benefit of boosting its stores’ reputation as centers of health and wellness, a reputation at odds with selling carcinogens at the checkout counter. And that reputation was core to its growing pharmacy benefits management business, asBarron’s pointed out.[2] The chances of renewing a vital contract with the Federal Employee Health Program was at stake. Cigarettes were gone by the end of the year.

Beyond strategic decisions like that one, stakeholder engagement leads to performance improvements by building enterprise resilience – the capacity to anticipate and react to change, not only to survive, but also to evolve. Enterprise resilience is comprised of six traits and stakeholder engagement plays a role in several of them.

For example, trust is an enterprise resilience trait that stakeholder engagement is directly linked with. Trust, after all, is earned from stakeholders, so it makes sense that engaging with them builds trust. It could be as simple as hearing customer displeasure on social media. A resilient company would pick up on those signals and deploy a rapid response strategy to right the wrongs. In so doing, it helps to build its reputation as a company that acts responsibly when shortcomings emerge. In other words, it’s a company that customers, employees and communities can trust to do the right thing.

That rapid response is part of a different enterprise resilience trait: agility. The resilient company responds to customers at the speed that customers expect. Rarely does a company have the luxury of passing reports assembled by front-line employees to their managers and then to business unit heads, if it wants decisions made at the speed that customers expect. Front-line employers need to be empowered to act on their own. Leadership needs to trust (there’s that word, again) that its employees are all on the same page.

Finally, stakeholder engagement promotes a corporate strategy that creates a perception and reality of the relevance of the company, another trait of resilience. Relevance applies to the company’s relationship with stakeholders and the broader market. When a company is critical to the success of stakeholder groups, whether it is a pharmaceutical company creating medicines for an underserved patient base, an automobile manufacturer producing green or highly efficient cars or parts, or an ocean water desalinization plant serving an area bereft of fresh water, it’s more likely to withstand shocks that could drive the company out of business. A clear understanding of stakeholder needs allows companies to understand, adjust and communicate their relevance to the market, in order to survive adverse developments and, if market-based, gain a competitive risk advantage over their competitors.

Opportunists see lots of change coming. But their instinct in the face of uncertainty isn’t just to amp up their risk management. Rather, opportunists are responding by getting closer to stakeholders and building their resilience. More-resilient companies are better able to cope with change, so they can take bolder actions, with more confidence in growth, and, according to a majority of CEOs in our survey, with more profitability in the future.

If you have that same gut feeling that threat levels are rising, it’s time you acted to build your own enterprise resilience.

 

 

[1] “The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance,” by Eccles, Ioannou and Serafeim (2012).

[2] “Health Gains Ahead for CVS,” by Jack Hough, Barron’s (February 15, 2014)