Managing Risk In The New Normal
Is the New Normal actually new? The world has been increasingly VUCA – Volatile, Uncertain, Complex and Ambiguous – in the past few decades. But then again, the world has always been VUCA. “There has been talk about strategic change (which is essentially dealing with VUCA) since the 1970s,” said Dr M Hariz Chrisminder Abdullah, PETRONAS’ Head of Business Risk Management. “The only difference is that we are getting information faster now than we did 40 or 50 years ago.” Chris and Friday Concepts Group MD, Ramesh Pillai, presented different perspectives on the topic at a recent IERP Tea Talk.
Multiple definitions of “New Normal” exist but the relevant one will depend on the perspective of the user. The important thing, he said, was to understand that change is constant, and that this can lead to non-congruency in the way that things are said and done. Among other factors, strategy, planning and culture have to be incorporated to effectively manage the New Normal. In addition, the appropriate application of technology to strategy may bring to light opportunities for the organisation – but it must do due diligence and make adjustments as it progresses.
“Performance needs close that will enable you to draw up a workable roadmap,” he said. “You need to understand how to protect your investments in another country, for instance. Monitoring is required before, during and after the investment is made because events and environments change constantly. Citing an example of political instability, he said Argentina, where PETRONAS had business interests, was then working with the IMF to restructure its debt. This created a volatile situation which had a significant impact on PETRONAS’ business in the country.
There needs to be constant monitoring, reporting and identification of risks to help preserve the value of assets. Personnel should be encouraged to look for opportunities, but the extent of the risk must be understood. “Know the up side and down side of the risk,” he advised. “When bad things happen, they may not be completely bad. They may also indicate where shortfalls lie, so these can be mitigated.” He reiterated that the New Normal is not totally new but the focus should be on fundamentals.
“Go back to basics. Know the extent of your resources and apply them accordingly.”
Chris’ approach was more operations-oriented, while Ramesh’s presentation was anchored to a Board perspective of governance and oversight, focusing on risk management and risk governance in the New Normal. “Don’t just look at the New Normal,” Ramesh pointed out. “Look at the Next Normal.” Stressing that conditions were currently disrupted and uncertain, he said that generally, nobody had a firm idea of what the next step should be but it was imperative that preparations for tomorrow began today.
In a volatile, dynamic situation where nothing can be accurately predicted, plans cannot be made because no one really knows what to anticipate. Boards therefore need to help management think about what the next steps should be. “Directors need to be strategically focussed and commercially-oriented at this time,” he said. “And they cannot compromise on governance despite risk pressures. Management may be good at managing today but the Board has to help them think for tomorrow.” It can do this by considering five “Horizons”: Resolve, Resilience, Return, Reimagination and Reform.
The New Normal is about Resilience but the Next Normal is about going forward. Different teams will be needed to manage these horizons by looking at a variety of scenarios to determine what works for their organisation, and what won’t. Overall coordination may be undertaken by a “Nerve Centre” that considers all scenarios simultaneously. Organisations should not let disruption and uncertainty constrain them from moving forward. “Start by moving in a general direction,” he said, “and if something goes wrong, adjust and try to maintain your forward momentum – and go back, if necessary.” Organisational agility is crucial.
Crisis management needs to be scalable according to the level of the crisis; leadership capacity should be augmented to strengthen decision-making. Board members, being senior, will have experienced similar crises; their collective knowledge will be invaluable to the crisis management team. Short- and long-term priorities will have to be balanced. Short-term priorities like hard cash supply are imperative. “You have to know how to manage your cash position,” Ramesh stressed.
“Companies that survive are the ones that have been able to manage their cash flows successfully.”
Boards need to ensure that the organisation can pivot, he added, and if they can survive another MCO. Examples abound of the suffering experienced by people in some countries with extended lockdowns. Unable to leave their homes, they could not go out to work or to carry on their businesses. As a result, the supply chain has suffered; repercussions have been felt worldwide. Planning therefore has to be able to accommodate sudden changes in the environment. From the risk perspective, organisations need to concentrate on Reimagination and Reform to stay ahead of the New Normal.
Organisations need to reassess their purpose and value proposition. “What you do depends on your resources, support and vision,” Ramesh said. “Plan for the next crisis. The New Normal is what people are focused on but the Next Normal is what companies have to concentrate on.” How will Boards manage this? One way is for the Board to be diverse. Diverse Boards have access to a wider range of perspectives and experiences that are crucial to strategy and planning. They should be clear of what their roles and accountabilities are, and ensure adequate procedures and controls are available.
Teams need to have members who will ask the difficult questions and challenge “accepted” methods of doing things. The Board will also realise that it has to start managing perceptions, both internal and external. It can help management by being more communicative with stakeholders and shareholders. But because nobody knows how long the Pandemic will last, the focus should be on strategy. Immediate risks should be identified; Board and management should try to anticipate emerging risks as well. The Board should support management in determining what systems, networks, processes and procedures should be slotted in place, taking into account the possible duration of the Pandemic.
It is worthwhile noting that, during times of disruption, cybersecurity especially should be intensified as cyberattacks are likely to increase. The Board and CRO have to help the management team(s) define the structure of the strategy that will be required, going forward. “To survive the Pandemic, Boards will really need to look outside the box,” Ramesh said. “Slow reactions are normal but this can be fatal. Others will get ahead, and you may lose first-mover advantage. Reimagine all possible outcomes, and move in the direction of the new strategy. You cannot afford to be static. The world is not stationary and will not pause for you.”