Regulatory risk tops list of threats to business

Managing talent and dealing with emerging markets fastest risers in annual risk radar.

The third annual Ernst & Young Global Business Risk report 2010 highlights that despite the acute stress of the financial crisis having passed, organizations continue to face a variety of recurring and new threats and challenges across all sectors as the global economy exits recession, according to an Ernst & Young report.

In a series of in-depth interviews, over 70 leading industry executives and analysts across 14 industrial sectors were asked to identify and rank the top business risks for each sector for the next 12 months as well as risks currently below the radar that could rise into the top ten in the years ahead.

The top 10 risks for 2010 (ranking from 2009 in brackets) are:

Regulation and compliance has remained one of the most prominent risks since 2008 when these reports began. In 2009, this risk was only exceeded by worries about the credit crunch. For 2010, regulation and compliance has regained the top spot across the majority of sectors driven principally by the general uncertainty surrounding regulation, which commentators believe is stalling business decision-making. However, access to credit and the threat of continuing weak economic performance in parts of the word remained high on the list of potential concerns.

Risks associated with a return to normality
Recruiting and managing talent was a significant climber up the risk table this year as was dealing with emerging markets; and social acceptance risk and corporate social responsibility (CSR) was new to the list this year, suggesting different strains on business as the economic recovery takes shape.

Mrs. Mildred Tan, Head of Advisory for Asean Sub-Area, Ernst & Young says: Crisis or not, talent management is always an important consideration. Cost-cutting and restructuring measures during the tough times may have put a strain on human capital, resulting in some employees finding themselves taking on new responsibilities for which they have little training or direct experience. Now with some sense of normality returning, there could be greater impetus for companies to refocus on how to retain and compete for available talent, and develop programs to build up the skill sets that companies lack, so as to steer the business back on the path of growth.”

“Companies are also looking at the risks and opportunities of investing in emerging markets, while recognizing that access to credit and the risk of a double dip recession are still possible challenges. So even as we see economic recovery, now is not the time for companies to take their eye off the ball,” Mrs. Mildred Tan continues.

Analysis by sector
The report highlights the different ways in which key risks surface across sectors. With the most important business risks for 2010 concentrated in the areas of regulation and compliance, many of these threats are related to the aftermath of the global financial crisis.

Asset management, banking, and to a lesser extent, insurance are facing a political backlash and regulatory overhaul following the global financial crisis. Oil and gas, real estate and mining and metals are contending with efforts by resource-constrained governments to gain revenues. In addition public sector organizations must continue to be responsive to the changing economic and political landscape.

Social acceptance risk and CSR are seen as a particular threat to the reputation of the asset management and banking industries, “managing planning and public acceptance risk” to power and utilities companies, “maintaining social license to operate” in mining and metals, and several below-the-radar threats in technology, telecoms and the public sector.

From a global perspective, there were considerable variations in the sector-by-sector impact of a lack of “access to credit” which was highlighted as the second most important risk. This ranges from “residual credit quality issues” in banking, to general “financial shocks” in insurance, to “access to capital” in power and utilities and mining and metals, and to the broader question of “capital access and allocation” in life sciences.

Mrs. Mildred Tan concludes: “It is clear that across the sectors, organizations need to continue to scan the environment to identify emerging risk issues. The scope of risk assessment should be expanded from within the organization through to the value chain of suppliers, customers, business partners and key stakeholders. The ability to anticipate threats, respond and continually adapt is as critical a part of the management process as it ever has been.”