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Dealing with New and Emerging Risks in an Ever Changing World. Paul J. Sobel Vice President/Chief Audit Executive – Georgia-Pacific, LLC Vice Chair – Professional Development for The Institute of Internal Auditors. Presentation Outline. The Changing World Impact of Emerging Risks

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dealing with new and emerging risks in an ever changing world

Dealing with New and Emerging Risks in an Ever Changing World

Paul J. Sobel

Vice President/Chief Audit Executive – Georgia-Pacific, LLC

Vice Chair – Professional Development for The Institute of Internal Auditors

presentation outline
Presentation Outline
  • The Changing World
  • Impact of Emerging Risks
  • Evolving Risk Assessment Approach
  • Dealing with Risks in a Dynamic Business World
  • Summary
the changing world
The Changing World
  • Global and organizational change
  • Stressed financial structure and cash availability
  • Bankruptcy and restructuring
  • Fraud from many fronts
  • Legislative imperatives and pressure
  • Technological innovation
  • Competition for market share
  • Shareholders demanding increased accountability
  • Client’s changing expectations
  • Pressure/expectations from stakeholders and citizens
  • Strategic alliances
  • Mergers and acquisitions
impact of emerging risks
Impact of Emerging Risks
  • New risks keep emerging
  • Risk interdependencies are creating almost unimaginable risk scenarios
  • Speed of change has rendered static, annual risk assessments almost meaningless
  • There seems to be very little tolerance for ineffective risk management
evolution of risk assessments
Evolution of Risk Assessments
  • In the 1980’s a formal risk assessment was an uncommon, somewhat unsophisticated practice
  • In the 1990’s risk assessment became a “leading practice”
    • While it was more structured and sophisticated, it still left many “blind spots”
  • In the early 2000’s, annual risk assessments were a standard practice
    • Some were updating risk assessments more frequently
    • Still had “blind spot” issues
  • The financial crisis beginning in 2008 caused many to question the value of risk assessments
risk identification approach
Risk Identification Approach
  • Continually scan the risk environment
    • Check available public documents
    • Search for specialist publications
      • A lot of good stuff from outside the United States
    • Deeper knowledge sharing with competitors
  • Brainstorm previously unimaginable risk scenarios
    • Disciplined structured process
      • Embedded in strategic planning (60% of failures relate to strategic risks)
    • Extensive consideration of interdependent risks
    • May need to bring in specialists (e.g., economists, analysts, deal makers, regulatory experts)
  • Consistently challenge the completeness and veracity of all risk assumptions
risk assessment the past
Risk Assessment – The Past
  • Traditionally focused on Impact and Likelihood
  • Tends to be single point outcomes as opposed to range of outcomes
  • A good foundation, but is it robust enough in today’s business world?

High

IMPACT

Medium

Low

Remote

Possible

Probable

LIKELIHOOD

other risk assessment factors
Other Risk Assessment Factors
  • Velocity
  • Readiness
  • Capacity
  • Controllability
  • Monitorability
  • Interdependencies
  • Frequency of occurrence
  • Volatility
  • Maturity
  • Degree of confidence
risk velocity
Risk Velocity
  • This has become the risk assessment “criteria du jour;” however, there are different types of velocity
  • Speed of onset
    • How quickly does the risk descend upon us?
    • Do we have much warning?
  • Speed of impact
    • Do we feel the effects right away, or does the pain slowly increase?
    • Does it spread and impact us in other ways; e.g. reputation?
  • Speed of reaction
    • Even if we see it coming, do we have the agility to timely react?
risk readiness
Risk Readiness
  • Given that risk represents uncertainty, how ready are we to deal with a risk event?
  • Focus is on an organization’s ability to:
    • Recognize the onset of the risk
    • Respond timely and effectively
  • Must also consider 3rd parties’ ability to respond timely and effectively
  • Risk readiness is really the response part of the risk velocity criteria
risk capacity
Risk Capacity
  • Decisions regarding risk readiness must consider an organization’s capacity to absorb or take on risk
  • First consider organization’s appetite and tolerance for the risk outcomes (before sustainability is impacted)
    • Resilience to consequences
    • Cost/pain to manage
  • Also consider recovery time – i.e., how long until the outcomes/effects are no longer felt
other risk characteristics
Other Risk Characteristics
  • Controllability – Do we even have the ability to mitigate/control the risk?
  • Monitorability – Can we monitor:
    • Risk signposts to anticipate risk onset?
    • Risk impact to understand how much we’re bleeding?
  • Interdependencies with other risks
    • Vulnerability to other risks being triggered
    • Correlation with other risks (Charles Kindleberger)
other risk characteristics1
Other Risk Characteristics
  • Frequency of Occurrence – Will a risk occurrence likely be a single event or will it occur multiple times?
  • Risk Volatility – Does the risk lend itself to an infrequent assessment (e.g., annually) or should it be re-assessed on a regular basis?
  • Risk Management Maturity – Is our risk management mature enough to trust our initial reaction to a risk event?
  • Degree of Confidence – How confident are we in our risk assessment judgments?
how do you make sense of all this information
How Do You Make Sense of all This Information?
  • Mapping Multiple Dimensions Won’t Work!
a possible approach
A Possible Approach?
  • Start with traditional impact/likelihood assessment
  • Determine which Other Risk Assessment Factors are relevant and meaningful
  • Assess whether those factors will significantly, moderately or negligibly affect:
    • How the risk is managed
    • How the risk is prioritized relative to other risks
    • How the risk is monitored and reported
a few cautions
A Few Cautions
  • Don’t make it too formulaic – it’s still primarily about judgments!
  • Never lose sight of the fact that risk assessment must tie back to strategy
  • Plan ahead for how you’ll respond to significant risk events
    • Decisive decision vs. consensus building
    • Initial response may differ from long-term response
dealing with risks in a dynamic business world
Dealing with Risks in a Dynamic Business World
  • No one-size-fits-all or simple answers
  • Starts with good risk information
    • Identify risk events early
    • Initiate risk actions quickly
    • Monitor effectiveness of risk actions
  • Must have a good escalation process
    • Who needs what information and when?
  • Don’t just treat the symptoms; cure the disease
  • Be flexible to change; don’t become too attached to what worked in the past
in summary
In Summary
  • We live in a dynamic, ever changing business world
    • The speed of change will continue to increase
    • The impact of mistakes will become even greater
  • Identifying possible emerging risk scenarios will be critical to success
    • In particular, scenarios among interdependent risks
  • Risk assessment must consider criteria beyond Impact and Likelihood
    • But don’t make it too complex; it’s still about judgments
  • Dealing with risk events requires a structured and disciplined approach; an ad hoc, reactionary approach won’t cut it