Post-COVID-19: Directors face a new set of risks in the 21st century
Some argue that the COVID-19 crisis should not have been such a sudden and significant shock, and that a global pandemic should have been on the list of foreseeable risks.1 Some governments already had relevant health measures and public policies in their tool kits, ready to deploy. This being the case, should business leaders have been better informed about the likelihood of a pandemic? Should this have been on their risk horizon? What role can directors play if they want to help the organisation plan for future risks?
To help organizations navigate upcoming stormy seas, we must take into account specific 21st century realities, which will undoubtedly present organizations with many opportunities, but also a new set of risk factors to incorporate into corporate governance.
Some risks are internal to an organization and often preventable (e.g. fraud, #MeToo denunciations, criminal and regulatory violations, etc.), while others are external to the organization and frequently unavoidable (e.g. cyberattacks; environmental disasters; threats to human or animal health; market downturns and other economic issues; elections and regime changes; political issues (treaties, free trade); and social unrest (student strikes, yellow vest movements, populism, changes in public opinion, wars, etc.)).
Whether they are avoidable or not, many of these risks are, in fact, foreseeable. For this reason, it is proper for both management and senior staff to discuss the post-COVID-19 future and ensure that their organizations will prosper in the longer term.
Identifying and assessing new risks
Taking stock of new risks is not only essential to ensuring business continuity during a crisis, but also to making organizations more resilient over time.
This process involves identifying and evaluating every stage in the trajectory of a potential risk. From a threat’s origin to its ultimate consequences for an organization, assessment is key to deciding whether and how a risk should be avoided, mitigated or accepted.2
However, there is some difficulty in assessing risk, mainly because assessment requires mobilizing a large amount of knowledge from various disciplines, as well as developing sophisticated and increasingly reliable methodologies and tools.3
Creating a safety culture with respect to risk
An organization’s success or failure at managing risk depends not only on specific prevention and mitigation measures but also on the strength of its “safety culture” and its approach to managing risk and safety at all levels of decision making.4
It has become increasingly important to develop a risk culture within the organization. Directors are well placed to instil this culture, firstly, by nurturing it within the board, then by demonstrating it in their relations with management.
At the board level, creating a risk management committee is an excellent way to ensure that the board as a whole is guided by the best practices and latest developments in this area.
Moreover, a board of directors composed of qualified members with a range of profiles will ensure greater multidisciplinarity in risk assessment work. The gender parity, ethnic and cultural diversity, youth, and range of professional backgrounds of board members are all assets in this holistic effort. Advice from experts in the field can also help management and the board to extend their thinking beyond what is already known and expected, to ensure a more comprehensive view.5
Preparing for the future
Without attempting to be exhaustive, the following paragraphs present some of the global risks in 2020 and outline a range of new, post-COVID-19 risks. After a multi-year tendency in favour of globalization, current circumstances require new thinking about the future of our economy, many sectors of which are dependent on global supply chains and exports.
1) Global Risk Landscape in 2020 (Pre-COVID-19)6
In its Global Risk Report 2020, the World Economic Forum (WEF) described an unstable world and offered a broad perspective on the significant threats likely to affect global prosperity in 2020 and the decade to follow. The 2020 report urged stakeholders to find ways to act quickly and consider the impacts of the following risks:
- Environmental risks
- Air pollution
- Biodiversity loss
- Climate change
- Earthquakes and volcanic eruptions
- Storms and cyclones
- Governance of oceans and polar regions
- Extreme heat waves
- Technological risks
- Information infrastructure breakdown
- Online data and information security
- Threats from new technologies
- Cyber attacks
- Economic risks
- Asset price collapse
- Extreme commodity price volatility
- Extreme consumer price volatility
- Extreme energy price volatility
- Fiscal crises
- Global imbalances and currency volatility
- Liquidity/credit crunch
- Regulatory failures
- Retreat from globalization
- Slowing Chinese economy
- Political and geopolitical risks
- Political polarization and populism
- Fragile states
- Geopolitical conflicts
- Global governance failures
- Illegal trade
- Organized crime
- Space security
- Weapons of mass destruction
- Loss of public confidence
- Social and health risks
- Chronic and infectious diseases
- Demographic challenges
- Economic disparity
- Food safety
- Water security
- Ethical Risks
- Lack of transparency and loyalty by management and directors
- Insider trading
- Abuse of power
- Conflicts of interest
- Extreme performance culture
2) A range of new risks, post-COVID-19
After the first few weeks of the unprecedented global health crisis caused by COVID-19, it is time to develop an overview of the post-crisis period within the changing global context. What new risks has the current crisis provoked?
In a recent bulletin to investors, investment bank Natixis raised the possibility of the end of neo-liberal capitalism as a model for capitalism.7 Currently, this risk factor appears to be among the most crucial, as this economic system tended to favour globalization, smaller governments, reduced tax burdens, privatization and, in some countries, weak welfare systems.
In its bulletin, Natixis argues that the COVID-19 crisis will most likely provoke:
- a return to regional value chains instead of global value chains, i.e. a de-globalization of real economies;
- an increase in public spending on health care, unemployment benefits and support for businesses, thus putting an end to fiscal austerity where this was in place, and an end to tax competition, as governments will be looking for revenue;
- a new desire for government intervention to define and develop strategic local industries (e.g. pharmaceuticals, new technologies, renewable energy, food and defence).8
As mentioned in our previous article, corporate governance is no longer based solely on maximizing profits for shareholders but on decision-making processes that take into account the interests of all stakeholders (employees, customers, suppliers, subcontractors and society in general).9
The growing public expectation in terms of corporate ethics is matched by companies’ increasing desire to shoulder their social responsibility. This is prompting both managers and directors to take a proactive approach to these issues.
For board members, assessing ethical risks goes much further than merely evaluating compliance issues (i.e. ethical compliance). It is the board’s responsibility to ensure that an organization’s real ethical risks are identified and analyzed. This evaluation is all the more critical during this enforced break. The philosopher and sociologist Bruno Dufour invites us to use this period of confinement to make an inventory of activities to be re-evaluated and even provides a tool for doing so.10
The ISO 26000 international standard: a reference framework for ethical governance
In 2010, the International Organization for Standardization (ISO) developed the ISO 26000 standard, which sets out guidelines for social responsibility and encourages organizations to go beyond legal compliance by integrating ethical principles and socially responsible behaviour in their business decisions and activities.
Thus, the Guidance on social responsibility makes organizational governance partly responsible for maximizing an organization’s contribution. Issues addressed by the standard include sustainable development, human rights, labour relations, the environment, combating corruption, consumer protection, and community involvement and development.11
Management and directors should reach out to experts in this field to see beyond their current risk horizon and gain a more comprehensive perspective.
One of the significant effects of this crisis is that it will call into question current ways of doing things, including off-shoring production, government procurement policies and consumption habits. Buying locally and the related benefits to our economy, independence, health and environment will certainly be part of the discussion, without completely ignoring the benefits of imports, exports and globalization, which are also essential to our growth. These potentially significant changes do not necessarily mean the end of the world as we know it, but they do at least call for a fundamental analysis of a company’s business model.
Faced with this picture, directors must ask themselves several questions:
- Does the governance structure ensure that issues related to these risks are adequately monitored?
- Does the board of directors have the knowledge and expertise to understand these issues?
- Does the system for recruiting and compensating executives support the appointment of directors with the skills to navigate these new risks?
- Does the corporate culture encourage innovation and adaptability in the face of these new risks?12
- Does the company promote a culture that reminds team members that ethics is everyone’s business?
- Do directors participate in establishing and updating an organization’s values? Do they check that the stated values are current within the organization and integrated into decision making, risk assessment, and recruiting and evaluating directors and staff?
- Are indicators in place to assess the state of the organization’s ethical performance?
1 In 2005, U.S. President George W. Bush laid the groundwork for dealing with future pandemics (https://abcnews.go.com/Politics/george-bush-2005-wait-pandemic-late-prepare/story?id=69979013); in a 2015 TED Talk, American businessman Bill Gates warned the world about the risks of a global epidemic (https://www.forbes.com/sites/brucelee/2017/02/19/bill-gates-warns-of-epidemic-that-will-kill-over-30-million-people/#2dfddb9d282f); see also Wucker, Michele. The Gray Rhino: How to Recognize and Act on the Obvious Dangers We Ignore. St. Martin’s Press, New York, 2016 (the author distinguishes between a “black swan”—a metaphor for a significant, unforeseen shock—and a “gray rhino”—a foreseeable threat that has not been taken into account).
2 OECD (2003). Emerging Risks in the 21st Century: An Agenda for Action. Paris. pp. 15-16; see also: OECD Recommendation of the Council on the Governance of Critical Risks, http://www.oecd.org/gov/risk/recommendation-on-governance-of-critical-risks.htm, accessed April 7, 2020.
3 OECD (2003). Emerging Risks in the 21st Century: An Agenda for Action. Paris. pp. 15-16.
4 OECD (2003). Emerging Risks in the 21st Century: An Agenda for Action. Paris. p. 15-16; see, in particular, OECD Recommendation of the Council on the Governance of Critical Risks, http://www.oecd.org/gov/risk/recommendation-on-governance-of-critical-risks.htm, accessed April 7, 2020.
5 Business ethics and OECD principles: What can be done to avoid another crisis?
6 For this section: See, in particular, World Economic Forum in Partnership with Marsh & McLennan and Zurich Insurance Group. (2020). The Global Risk Report 2020: Insight Report (15th ed.). Geneva, p. 11; Desjardins, J., & Willis, A. (2011). Sustainability: Environmental and Social Issues Briefing: Questions for Directors to Ask. Toronto: The Canadian Institute of Chartered Accountants. p. 3.
7 NATIXIS. (March 30, 2020). Will the coronavirus signal the end of neo-liberal capitalism? Flash Economics, 381, p. 1-2.
8 NATIXIS. (March 30, 2020). Will the coronavirus signal the end of neo-liberal capitalism? Flash Economics, 381, p. 1-2.
9 Éthique et gouvernance d’entreprise (French only).
10 Imaginer les gestes-barrières contre le retour à la production d’avant-crise (French only).
11 ISO. (2014). Discovering ISO 26000: Guidance on social responsibility. Geneva, p. 14-15.
12 Desjardins, J., & Willis, A. (2011). Sustainability: Environmental and Social Issues Briefing: Questions for Directors to Ask. Toronto: The Canadian Institute of Chartered Accountants. p. V.