Top Risks of 2021 Identified by Board of Directors & C-level
A recent survey conducted by Protiviti and NC State University’s ERM Initiative discloses the influence of the COVID-19 pandemic, the economy, digital technology, talent and organizational resiliency on the risk landscape over the near term. Protiviti’s Jim DeLoach outlines the most significant risks organizations are facing.
Overall, 1,081 C-level executives and directors participated in this year’s global study, with 39 percent representing companies based in North America, 19 percent in Europe, 17 percent in Asia and Australia/New Zealand and the remaining 25 percent from Latin America, the Middle East, India and Africa.
Conducted online after the November 3 elections in the United States, the survey asked each respondent to rate 36 individual risk issues using a 10-point scale, where a score of 1 reflects “No Impact at All” and a score of 10 reflects “Extensive Impact” to their organization over the next year. For each of the 36 risk issues, we computed the average score reported by all respondents. Using mean scores across respondents, we rank-ordered risks from highest to lowest impact.
As with their prior surveys, the results captured significant uncertainties by industry, executive position, company size and type, and geographic area. Following is a summary of the overall global top 10 risk themes for 2021 in order of priority, with the previous year’s rankings noted parenthetically. This summary provides a context for understanding the most critical uncertainties companies face as they look forward to the next 12 months.
1. Government Policies to Address the Pandemic May Lead to Regulations and Protocols That Significantly Impact How We Do Business and Our Performance (New)
To address the ongoing global health crisis caused by COVID-19, governments around the world have rapidly implemented new policies, rules and regulations surrounding travel and border controls, public health practices and social distancing that have, in many cases, led to the temporary shutdown of business and commerce. Because of the lack of experience in dealing with a global health crisis of the present magnitude and the evolving nature of the COVID-19 virus, frequent revisions by governments of those policies have led to unprecedented levels of uncertainty for business leaders as they try to maximize the performance of their organizations. The efficacy of vaccines and the effective functioning of their distribution and administration impact this risk.
2. Increased Concern About Economic Conditions Restricting Growth Prospects in Relevant Markets, But With Some Exceptions (2)
Concerns related to overall economic issues in domestic and international markets remain high for 2021. The economic impact, including record levels of unemployment, largely spawned by COVID-19 lockdowns and restrictions, along with the uncertainty regarding the lingering effects of the ongoing pandemic, continue to represent significant challenges in many industries. While economic sentiment may be improving, the economy remains a concern, particularly in industries dependent on the gathering of people.
3. Market Conditions and Shifts in Consumer Behavior Resulting From the Pandemic May Continue to Impact Customer Demand (New)
COVID-19 forced organizations of all types around the world to suddenly alter how they deliver core products and services to their customers. Lockdowns, social distancing and the shift of the workforce from organizations’ facilities to remote locations have altered how consumers search for, buy and take delivery of key products and services. In many industries, the crisis introduced a window to innovate more, accelerating the use of technology by companies to do things that they never considered previously. Remote working, flexible work arrangements, click and collect, online channels, 24/7 video health care, online shopping, home delivery, digitization and automation in all its forms are just some examples of digitally enabled ways of doing business that have been highlighted during the pandemic and are being deployed on a broader basis. The lingering effects of the pandemic may lead to greater consumer embrace of new and evolving purchasing behaviors and delivery methods, which may negatively impact demand for organizations that do not innovate and respond effectively to these shifting preferences and expectations.
4. The Adoption of Digital Technologies in Transforming the Business May Require New Skills That the Organization May Not Be Able to Acquire Except Through Upskilling and Reskilling Employees (10)
Artificial intelligence, automation, natural language processing, visual imaging capabilities and other technologies are expected to displace millions of job functions as well as create new job functions necessary to achieve the full value creation potential expected from deploying these disrupted technologies. For example, as artificial intelligence disrupts the customer experience, new job functions will likely entail interpreting and acting on customer data and using it to drive improvements in processes, products and services. As the future of work evolves through digital transformation, companies will need to upskill and reskill displaced workers to take on new job functions and fill talent gaps. Those companies that can do so will prevail over those that cannot.
5. Privacy and Identity Management (7)
The rapid expansion of digital technologies is also increasing concerns over privacy and identity management. The proliferation of data gathered, stored and transmitted across all types of organizations and across international borders is exponentially increasing operational challenges related to tracking, warehousing and protecting data. Meanwhile, data privacy laws and regulations continue to proliferate in multiple jurisdictions, granting power to the customer over how their personal data is collected and used. The ever-increasing complexity of the data privacy space has made it a branding imperative to make conscious, intelligent decisions over what data is gathered and why, as well as how it is secured.
6. Managing Cyber Threats (6)
It is no surprise that threats related to cybersecurity remain a major concern as organizations focus on how such events might interrupt core operations. The rush to “go virtual” in all aspects of operations may have inadvertently created unknown security weaknesses, particularly on the human perimeter. Cybersecurity is a moving target as innovative digital transformation initiatives, cloud computing adoptions, mobile device usage, automation, machine and deep learning and other applications of exponential increases in computing power continue to outpace the security protections many companies have in place. Cyber threats extend beyond hackers gaining access to systems and encompass serious advanced persistent threats from nation-states and malicious cyber criminals playing for keeps.
7. Regulatory Change and Heightened Regulatory Scrutiny Impacting Operational Resilience and Production and Delivery of Products and Services (1)
Over the nine years they have conducted this survey, this risk has been ranked in the top 10 list of risks each year. The overarching issue relates to perceived concerns about how all types of regulatory requirements and oversight seem to be expanding or potentially could expand in multiple areas that may lead to even greater disruptions in business models and, more important, constrict companies’ ability to innovate in critical areas. Expanding rules as to what is acceptable business practice are impacting all types of organizations, even those in non-regulated industries. Recent shifts in regulations related to privacy, product development and approval, the environment, social issues and broader governance expectations and volatility in geopolitical views related to trade and tariff policies are all leading to heightened awareness of what may seem like shifting sands in the rules and regulations organizations must monitor and obey.
8. Succession Challenges and Talent Acquisition and Retention (3)
Shifts in how individuals will want to work are likely evolving in light of the remote work environments most are now experiencing. Likewise, their ability to be nimble as to the nature of their work and how they want to live may strain the current capabilities of organizations to attract and retain the talent they need. While unemployment remains relatively high, many organizations are finding that the talent they need does not match the talent available in the labor marketplace. Respondents continue to perceive that significant operational challenges may arise if their organizations are unable to build and sustain a workforce with the requisite skills needed to implement their growth strategies, forcing them to consider alternative forms of labor. This reality is forcing companies to broaden their labor model to encompass contractors and the contingent workforce to complement the professional core. In addition, as markets change and new strategies are formulated and implemented, companies seek talented people to facilitate needed change and implement complex strategies. The uncertainty associated with acquiring and retaining such talent continues to be a concern as organizations consider more closely the future of work.
9. Resistance to Change (5)
As major business model disruptors emerge, board members and executives are growing even more focused on their organization’s potential unwillingness or inability to pivot and make necessary timely adjustments to the business model and core operations that might be needed to respond to changes in the overall business environment and industry. Executives continue to be concerned about their companies’ resilience and ability to enable change, despite the reality that change has become a way of life for most organizations. Whether covert or overt, resistance to necessary change spawned by disruptive innovations that alter business fundamentals can be catastrophic.
10. Existing Operations, Infrastructure and Digital Capabilities Unable to Adjust to “Born Digital” or Superior Performing Competitors (4)
Respondents remain noticeably concerned about the ability of their organization – relative to its competitors – to adjust existing operations, IT infrastructure and digital capabilities to meet performance expectations. Hyperscalability of digital business models and lack of entry barriers enable new competitors to emerge and scale very quickly in redefining the customer experience, making it difficult for incumbents to see it coming at all, much less pivot in a timely manner to preserve customer loyalty.
Others ranked just below the 2021 top 10 list were:
11. Inability to Utilize Data Analytics and “Big Data” to Achieve Market Intelligence and Increase Productivity and Efficiency;
12. Ongoing Demands on or Expectations for a Significant Portion of the Workforce to “Work Remotely” or Increased Expectations for a Transformed, Enhanced Collaborative Physical Work Environment May Negatively Impact the Effectiveness and Efficiency of the Business; and
13. Third-Party Risks Arising From Reliance on Outsourcing and Strategic Sourcing Arrangements, IT Vendor Contracts and Other Partnerships/Joint Ventures to Achieve Operational Goals May Prevent Achievement of Organizational Targets or Impact Brand Image.
Relative to the events of 2020, the relevance of these three risks ranked just below the top 10 for 2021 and the increased complexities in the marketplace are readily apparent.
The two risks that were included in last year’s top 10 list but fell below the top 10 this year are:
14. The Challenge of Sustaining Customer Loyalty and Retention May Become Increasingly Difficult (9) and
15. The Corporate Culture May Not Encourage Timely Escalation of Risk Issues (8).
Consistent with prior years, there is variation in views among boards and C-suite executives regarding the magnitude and severity of risks for 2021. This finding suggests the need for dialogue at the highest levels of the organization to ensure everyone agrees on the most critical enterprise risks. Boards and senior executives should consider the above risk themes and takeaways in evaluating their risk oversight and management focus in the coming year in the context of the company’s risks inherent in its operations. If these issues have not been identified or prioritized as matters to consider in managing the business going forward, their relevance to the company’s strategy should be considered.