Not surprisingly, most respondents to the recent EY survey – “Business Pulse: Exploring the dual perspectives on the top 10 risks and opportunities in 2013 and beyond” – believe that revenues need boosting. Yet rather than wait for mature markets to recover from the global financial crisis, they accept that the duration of the downturn is uncertain.
In this scenario, companies are repositioning themselves. They are looking to cut cost and increase efficiency to remain afloat in smaller, shrunken markets, especially in mature economies such as Europe’s. In addition, as many mature markets stagnate, firms are exploring options in rapid-growth markets.
This paradigm shift is causing companies to rethink their risks and their relative importance. Consequently, to prepare for what lies ahead, audit committees may need to refocus their oversight.
Navigating the key risks
Companies under pressure to outpace rivals in tough market conditions rank “pricing pressure” as the biggest risk they faced this year. With mature markets nearing saturation, price competition is fierce and little or no organic growth is expected.
Their second biggest risk is “cost cutting and the related pressure on profits”. Five years into the global crisis, companies have already cut the more obvious costs. Cutting further without damaging product and service standards will be a different ball game.
Market risks climbed to third place this year, driven by volatility in commodity prices, interest and exchange rates and equities.
Companies are increasingly reliant on rapid-growth economies which usher in new risks. Companies rated the grim wider macroeconomic outlook as their fourth biggest risk. Falling export growth and weakening domestic demand have damaged the larger, industrialised European economies. Firms accept the current climate as the “new normal” and plan around the possibility of a deep recession in the eurozone, among other possible problems.
For the first time, sovereign debt, the impact of austerity and political shocks made it to the top 10 risks.
To overcome this uncertainty, firms are developing a governance structure that aligns their risk profile and exposure more closely with strategy. They are shifting from a traditional view of risk to a contemporary, forward-thinking one.
Evaluating top opportunities
On the opportunity side of the equation, companies expected new approaches to their target customers and better operational efficiency to drive their growth.
Firms are developing a governance structure that aligns their risk profile and exposure more closely with strategy
They ranked their number-one opportunity as “innovation in products, services and operations”. “Emerging market demand growth” and “investing in process, tools and training to achieve greater productivity” came in second and third place respectively.
Companies also think that better stakeholder management through environmental stewardship will help them find new growth avenues. “Leveraging corporate social responsibility (CSR) and public confidence” entered the top 10 for the first time, and is expected to climb up further by 2015. CSR activities in rapid-growth markets are vital if companies are to obtain a “licence to operate”. And the ability to communicate CSR efforts effectively is critical to winning public trust.
Opportunities will also flow from improved investor relations. More transparent communication on environmental and social issues can encourage investors to commit long-term funds.
Investors are likely to want better information about a company’s management structures and operations, the nature of risks, strategic direction, performance and prospects.
Below I am posing a number of questions that audit committees should be asking themselves and their management:
• How do these risks impact our organisation and how are they factored into our risk management framework?
• Is management taking adequate measures to mitigate risks according to their likelihood and impact on the organisation? How well are you briefed by management on these matters?
• How does management determine which objectives and opportunities to pursue?
• What risk assessment measures do you undertake to evaluate the opportunities?
Audit committees in Malta have a significant role to play to help their companies secure stakeholder-related opportunities, as well as provide oversight on emerging risks. It is time to be brave in the new world emerging before our eyes.
Anthony Doublet is a partner at EY Malta Ltd.