A Clifford Chance study on boardroom perspectives on risk International law firm Clifford Chance asked the Economist Intelligence Unit to survey 200 board members from across the world’s largest global corporates and financial services firms to find out which risks feature at the top of the board agenda. The survey includes board members from 58 companies headquartered in the Asia Pacific region.
Board members’ responses show:
- Cyber risk no longer underestimated: 15% listed cyber as a top three risk priority in 2014, that proportion has risen to 47% in 2019.
- Climate concerns hit home: 54% of boards have taken action to address risks of physical interruption to business operations by climate-related risks.
- Individual accountability: 89% agree that board members should be held personally accountable for illegal and unethical uses of technology and 84% say board members should be personally accountable for meeting Diversity and Inclusion targets.
- Outdated mindsets a risk in themselves: 80% agree that outdated mindsets among senior management pose a significant risk
The results show Corporate boards are increasingly aware of the social impact of their decisions in areas which have moved from ‘compliance’ risks to reputational ones– notably, political risk, diversity challenges, technological developments, and contribution to climate change. In particular, companies headquartered in APAC indicated that cyber risk (74%), environmental risk (52%) and legal/regulatory risk (50%) would be more important or just as important over the next two years.
APAC-headquartered companies were also the most concerned about incidents or scandals arising from data protection or cyber. David DiBari, Co-Head of Clifford Chance Global Risk, comments: “Strong boards proactively manage risk to their competitive advantage. We are seeing a clear evolution in boardroom priorities in response to emerging global risks and an intensifying expectation of societal responsibility. These challenges are fuelled by regulatory and geopolitical changes, but also by a growing sense of accountability, and companies are well advised to be in the vanguard in addressing them.”
Five key themes:
- Overwhelming confidence on technology risk Since 2014, artificial intelligence (AI) has emerged as a technological reality and in some cases a cause for societal concern. Respondents are remarkably confident in their ability to understand and address the risks posed by the use of data and AI. However, understanding has not always translated to action, European respondents being the least likely to say they have taken preliminary steps to address the risk posed by the lack of AI oversight over business operations. Thirty-two percent say as much, compared with 42% and 36% in APAC and the US respectively. Dessislava Savova, Data Risk Lead, comments: “Confidence at board level in the risks posed by AI is only valuable to protect companies if reflected in concrete actions. The opportunities that AI pose are clear, but too often the risks are over-simplified and underestimated. As companies embrace innovation and deploy technologies to stay competitive, the ethical considerations, in addition to the legal requirements, need urgent consideration.”
- Boards take action on climate change Environmental risk has risen on the corporate agenda since 2014: 49% of respondents express ‘significant concern’ about environmental risks, compared to only 16% in 2014, the sharpest increase in concern after cyber risk. Over 90% say they fully understand their company’s contribution to climate change, with APAC respondents being the most confident in this regard. The most important consideration for APAC companies influencing their activities related to climate change are regulatory requirements and reputational risk. Thomas Voland, Climate Change Lead, comments: “Climate change is one of the major concerns for society and business. Organisations that take limited steps in mitigation risk severe consequences: from reputational damage to litigation. Consequently, environmental impact is accelerating up the boardroom agenda with intensifying discussions and a willingness to accept accountability. Words are not enough – investment and action must follow.”
- Increasing sense of personal accountability Business risks are not just a shared concern for Corporate Boards. There is a growing sense that individual directors should be held personally accountable for key risks. As a result, a culture of individual accountability, as well as collective responsibility, is emerging. 90% agree that board members should be held personally accountable for illegal and unethical uses of technology and 84% say board members should be personally accountable for meeting Diversity and Inclusion targets. Interestingly, board members at companies headquartered in APAC are comparatively the least concerned with the increasing exposure to personal liability as a barrier to joining boards as nonexecutive directors (85% vs. global average of 63%) Michelle Williams, People Risk lead, comments: “Board-level decision makers are now front-page news. Beyond traditional scrutiny focused on boards as a collective, we see increasing pressure to hold individual board members responsible where a company has found itself in front of angry shareholders, aggressive regulators and a finger-pointing public. Understanding risks and decision-making processes are critical tools in light of this emerging trend of personal accountability.”
- Shifting corporate pressures: doing good or making money? The imperative for companies to not just serve shareholders but be a positive force in society is a key business priority. Financial Risk is still the most discussed form of risk by corporate board members, but less so than before: 52% of respondents in 2019 say Financial Risk is a current top three priority focus, compared to 75% in 2014. Instead, concerns about environmental, social, and corporate governance (ESG) issues, which have manifested across Europe, the US, and APAC, have increased in importance. Rae Lindsay, Business and Human Rights Risk Lead comments: “Planet, people, purpose – and profit? Organisations that place sustainability at the core of business strategy maximise their potential for positive action while minimising any negative impacts of global operations. The scrutiny on big business is intense. Leadership involves confronting shifting corporate pressures with innovation, commitment and agility, bringing business resilience while protecting both brand and the bottom line.”
- Despite a noticeable rise in geopolitical tensions, political risk is a focal point for only 23% of respondents. However, this looks set to rise on the corporate agenda for the foreseeable future with over half of respondents expecting political risk to become more important in two years’ time. An interesting point is how companies are planning to mitigate these risks, with nearly a third of respondents opting to scale down their businesses ambitions as an approach to dealing with this risk. Romesh Weeramantry, Political Risk Lead, comments: ‘”n a climate where geopolitical uncertainty and volatility are the new norm, boards must manage and mitigate political risk to remain competitive. There are effective options available to businesses, but they require concrete, immediate and sustained action. When it comes to political risk – enhanced levels of due diligence, diversification, and dexterity are key to preventing significant financial risk or reputational damage.”