Boards should look beyond regular risk management to focus on strategic resilience

The Covid-19 pandemic is creating extraordinary challenges for companies and their boards on how to navigate these uncertain and turbulent times. While such “unknown unknowns”* are very difficult – if not impossible – to predict, it is never too early to start thinking about how to weather the next high-impact/low-probability disruption and come out stronger than before.

Regular risk management may fall short

As part of their oversight duties, the board of directors is responsible for making sure the company has put in place the necessary risk – and crisis – management capabilities to deal with the negative consequences of unforeseen events. Many companies have come a long way in implementing adequate risk management systems and processes, especially in the aftermath of the recent financial crisis. They are now better equipped than before to handle shocks through well-established processes for identifying risks, information systems that provide appropriate transparency on the downside impact, and contingency plans ready to be enacted whenever disaster strikes.

Yet, we observe that in some organisations risk management remains an underdeveloped and siloed function that receives relatively limited board attention. Boards that see their risk oversight role merely as a routine exercise in operational loss prevention or compliance, undermine efforts to embed risk into strategic decision-making and develop long-term corporate resilience. As a result, their organisations may find themselves scrambling in the face of major adversity like we experience today.

There is indeed a big difference between local, short-term risk events with rather well-known consequences, such as an industrial accident or a cyber-attack, versus global disruptions, such as the Covid-19 pandemic. The former situations, as overwhelming as their occurrence might be, can be expected to return relatively quickly to the “old normal” after proper recovery measures have been taken. In contrast, the latter typically do not lend themselves to an existing “playbook” approach to risk management and are much more likely to have a long-term impact – not only on individual companies but possibly on entire industries and geographies. We understand that today’s extreme circumstances caused by Covid-19 warrant the board’s immediate attention to be directed towards ensuring the company’s survival. However, we would strongly encourage directors to also adopt a long-term perspective on risk oversight, with a clear focus on strengthening the organisation’s strategic resilience.

Adopting a long-term view

Addressing the consequences of Covid-19 in a sustainable manner requires that the board help strengthen the company’s financial resilience beyond short-term economic pressures. Maintaining a long-term perspective, however, might entail a delicate balancing act to reconcile the interests of shareholders and other important stakeholders (employees, customers, suppliers and the broader community), as well as responding to calls for greater clarity on the organisation’s ultimate purpose. Take, for example, the recent public outrage about a financially strong international group that (ab)used the government’s emergency response to the Covid-19 crisis to defer rent payments on their shops, with potentially detrimental consequences for small store owners. In times of severe turbulence and existential anxiety, it is particularly important for boards not only to protect short-term financial and operational performance, but also tact as a beacon with a long-term view for the future on corporate purpose, social responsibility, and reputation.

Building resilience through preparedness and agility

While many companies are expected to suffer considerably from the Covid-19 situation, some organisations will find ways to come out of this crisis remarkably resilient. Boards of directors are well placed to ensure that the necessary “resilience capabilities” are in place that allow an organisation to bounce back from a high-impact disruption such as Covid-19, and adapt to the new reality more quickly than their peers. These capabilities relate to preparedness and agility. Preparedness involves actively engaging the diverse set of experiences and backgrounds present in the board and regularly obtaining outside-in views from external experts (e.g., top healthcare professionals). The board’s continuous outlook for what may be coming “around the corner” can significantly contribute to sharpening the leadership team’s sensing skills and detecting strategic risks before they escalate. Combining these insights and foresights in scenario planning exercises across multiple time horizons enables boards to take precautionary measures very early on that make their companies resilient to shocks. For example, forward-thinking boards may pressure test management’s assumptions about the longer-term consequences of the virus, such as highlighting the need to create the necessary transparency on tier-2 suppliers to expose critical vulnerabilities in their supply chain.

Such superior levels of preparedness and responsiveness enable companies to take decisions much faster and move with greater agility to get ahead of the disruption. As soon as the crisis appears to be under control, the board should stimulate the management team to think proactively about introducing new business models in the “new normal” after Covid-19, for example by accelerating their investments in digitalization. In parallel, it is important to shift from mitigating downside risk to becoming more opportunity driven. Board members need to proactively engage with their executives to discuss how even highly adverse events, such as the Covid-19 crisis, might be leveraged into strategic opportunities to be exploited in the longer term. For example, companies might consider acquisitions targeted at growth in previously underdeveloped market segments, such as a specialty chemical company diversifying into the medical hygiene products business. Effective risk oversight in the context of a major disruption such as Covid-19, thus requires boards to rise above their traditional monitoring role and develop a strategic stance to dealing with risk. Companies whose board members consider risk as an integral part of their business strategy rather than as an after-thought, are bound to have a competitive edge in building resilience for the future.

* The terms "known unknowns" and "unknown unknowns" are often used in risk management and strategic planning. Known unknowns refers to risks you are aware of, such as canceled flights. Unknown unknowns are risks that come from situations that are so unexpected that they would not be considered.

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