PwC report identifies a ‘fundamental shift in risk management’

Economic turmoil, political upheavals and natural disasters, all combined with advancing globalization and rapid technology progress, are creating a new era of risk for businesses and causing a fundamental shift in risk management practices, according to a new PwC US 2012 annual report.

Entitled ‘Risk in Review’ the report is based on a survey of more than 1,000 executives and risk management leaders.

"2011 marked a year of reckoning, and many companies are still struggling to create an effective approach to managing the ever-widening risk landscape. Businesses are scrambling to fix weak links in their systems stemming from non-traditional risks such as social media and digital technology, to dealing with the realities of operating in today's global marketplace," said Dean Simone, leader of PwC's US Risk Assurance practice.

"In this new risk era, corporate boards and senior management have a crucial role to play to ensure they set the right culture and align their strategy to risk imperatives."

According to the report, forward-looking companies are responding by shifting their risk management focus in several fundamental ways: from internal to external, from operational to strategic and from bottom-up to top-down.

To better prepare themselves to deal with unexpected events for the upcoming year and beyond, companies installed new risk management organizational structures, have put in place a new breed of risk management leadership and have adopted innovative techniques such as scenario analysis and predictive indicators.

To address changing risk landscape, PwC recommends the following risk management approaches for 2012:

Increasing cross-communication: Place greater emphasis on communications and data sharing in 2012 and take steps to improve cross-functional and departmental communication.

Improving data quality and reporting: Enhance global economic teams to help improve data quality and put in place improved processes for reporting data. Different business units should meet periodically with different business units to review and exchange information and data as a form of early alert to possible upcoming risks to the business.

Better forecasting and scenario analysis: Leverage more sophisticated tools such as early-warning systems and contingency plans to reconfigure approaches to manage risk (i.e. set up scenario models or Monte Carlo analysis geared to the nuances of the business, run models as events unfold, etc.)

Elevating the chief risk officer (CRO): Put risk management role on the proactive offensive instead of reactive defense by giving CROs more cross-functional access and ability to effect decision-making.

Integrating risk management: Manage risk holistically by continuing to integrate risk management into decision-making processes relating to ‘traditional’ functions (i.e. strategic planning). Don't exclude new areas of risk (i.e. talent management and outsourcing), but address and integrate them into decision-making processes.

Bolstering IT: Address data privacy and security concerns and take stock of where to build better processes, practices, procedures and technical defenses. Shifting technology and heightened competition for new customers in new markets are also exposed to more risks, so it's imperative to study the setbacks and successes of peers who pioneered the use of these new technologies.

Greater board involvement: Understand the risks facing a company and have in-depth discussions with management to make sure those risks are being handled properly. The discussion should also cover potential risks that are not yet on management's radar and what the implications of those emerging risks might be.

To download a full copy of the report visit: http://www.pwc.com/riskinreview