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Emerging risks and unknown unknowns

While certain catastrophic risks lie beyond a board's control, our research shows that many directors are nevertheless discussing and preparing for potential disaster in areas that might not have appeared on most boardroom agendas just a decade ago. As we have seen, effective boards are already changing their oversight procedures around cyber risk. Furthermore, at the best–run companies, the board and management strive to turn emerging risks into opportunities. For instance, one UK–based industrial manufacturer is looking beyond plastics in response to climate change—a new direction inspired by the CEO.

Reputational, operational, geopolitical and supply chain risks are also high priorities for board directors in some sectors, including manufacturing, food/consumer products and others. Respondents who cited reputational or supply chain risks see a broad range of danger areas (Fig. 3)—not surprising, given a global economy in which suppliers, partners and customers may be scattered around the world and a digital environment in which news, whether true or false, spreads nearly in real time.

Dan Cooperman, a board member at California based Molina Healthcare and chair of the cyber–risk committee, says Molina's board devotes special attention to unknown unknowns—and he notes it is not easy. “There are these unknown developments that have an incredibly large impact on the operations of the company,” says Cooperman “What do you do in a situation like that? It's contingency planning. You sit around and try to envision all the things that could happen and how best to respond. It's a very, very difficult thing to do.”

An important factor in most emerging risks is that they are difficult, if not impossible, to predict. The CFO of a UK–based utility described an unexpected weather event that cost the company a good deal of money and derailed progress on some initiatives. However, he was sanguine about the fallout, saying, “[The unexpected risk event] led to new levels of understanding of our risk environment and ultimately greater resilience to them.” Mitigating risks from sudden events beyond their control—like climate events, which are likely to become both more frequent and more severe—should now be a part of every board director's oversight mandate.

Mitigating risks from sudden events beyond their control—like climate events…should now be a part of every board director's oversight mandate

Fig 3: Product risk is the most common source of reputational risk

Which of the following could present a potential reputational risk to your business?

* Indicative due to relatively low sample size

Board report figure 3a

Fig 3: Equipment failure tops the list of operational risks

Which of the following could present a potential operational risk to your business?

* Indicative due to relatively low sample size

Board report figure 3b

When it comes to preparing for the unexpected, our survey revealed some startling differences by industry and turnover. Chemical industry respondents are the least likely to say they are confident that their board is doing all it can—though they are still almost in unanimous agreement (88%). Smaller companies in our survey (with annual revenues of less USD 250 million) are more likely to say they do not wait for scheduled meetings when they judge a risk to be imminent (83%, vs. 65% of companies with more than USD 20 billion in annual revenues). Meanwhile, 87% of telecom companies say they regularly discuss unknown unknowns, vs. just 44% of industrial manufacturing companies and 26% of engineering companies. This could reflect the breakneck pace of change in the industry due to technology advances.

Overall, 61% of survey respondents say their board or strategy committee regularly discusses unknown unknowns (this figure is highest in North America—69%—and lowest in Asia, at 49%). Many board members are keenly aware that preparing for unpredictable risks like equipment failure and weather events can be difficult. Even harder to mitigate are risks from competitor allegations or employee malfeasance. Interviewees who have had to deal with those risks, among others, take an optimistic view, saying their company has used the risk event as a learning opportunity.

Clearly, there is no universal approach to managing operational risks and unknown unknowns. But our interviews indicate that successful boards establish a culture of risk awareness. A non–executive director at a UK consumer products company said that on her board, “there is a full appetite for risk; no one regards it as ‘boring’, so it becomes strategic. If anything goes wrong, there is always a desire to understand why it wasn't foreseen. But there is no ‘blame’ culture if something was missed, just a desire to learn from it.”

One area where boards are working hard to prepare for the unknown is digital transformation, an area full of expectations, opportunities, and uncertainties.

…If anything goes wrong, there is always a desire to understand why it wasn't foreseen…there is no ‘blame’ culture if something was missed, just a desire to learn from it…

Fig 4: How boards approach corporate governance and risk oversight

Please rate your level of agreement with the following statements

* Indicative due to relatively low sample size

Board report figure 4