The relationship between public capital and private capital, macroeconomic risks and protectionism and data privacy are among the key connected risks trends that corporates need to be aware of in 2018, says Russell Group's latest white paper.
The paper, The Year Ahead: Risks and Opportunities in 2018 sets out these trends:
1 Public capital, Private Capital
Economist Thomas Piketty points out the steady rise in public debt on one hand, approaching or exceeding 100% of national income everywhere and standing at US$63.1 trillion globally, and the prosperity of privately owned wealth on the other.
The fact remains that private capital grew much faster than the decline in public capital, and that rich countries themselves hold even a little more. The power of private capital is increasingly in conflict with public capital depending on which side of the debate one stands on, but the risks and opportunities cannot be ignored, and must be adapted to.
2 US$74 trillion global economy
World GDP stands at $74 trillion, with up to a quarter of it generated by the US (24.3%), followed by China (14.8%) and Japan (4.5%). Yet the past two years have shown that this wealth can be disrupted by external shocks ranging from Nat CATs to political shocks, and 2018 seems to be no exception with geopolitical tensions on the Korean peninsula, Brexit negotiations and an embattled Trump administration.
The US’ announcement of a once in a generation tax cut that is predicted to fuel a boom in demand, while adding $1.5 trillion to the trade deficit, provides a macroeconomic risk yet opportunity that risk managers need to watch out for.
3 The world is not global, it’s local
Economist Pankaj Ghemawat has argued that the world has become "less connected" each year. This is not to say organisations do not have global operations or that people do not communicate with people from different nations. Rather, it is saying that local countries have their own economic conditions, cultures and values.
His idea of “rooted capitalism” called for business leaders to respect and understand not just the economic interests but cultural interests of each country that they sell or operate in. Succeeding in any market, such as the powerhouses of China and India, will require an adjustment of a company’s product, channel and marketing strategies.
4 Theme 4: Data Privacy: GDPR
With just over four months to go before the General Data Protection Regulation (GDPR) goes live on 18th May, companies may not be as well-prepared as they think. Failure to comply by any company anywhere in the world that does business with Europe and holds personal data about EU residents – for purposes such as profiling and big data analysis – could result in fines of up to EUR20 million (U$25 million) or 4% of its global turnover, whichever is the greater.
This is the year to study implications for international data protection standards and potential threats posed to business resilience, national security and critical infrastructure in today’s connected digital age
5 The New Protectionism
Protectionism in the connected world incorporates not just free trade but new areas such as data (the need for firms to comply with GDPR implementation by the EU in 2018 or lose business), environmental (the US’ retreat from the Paris Climate agreement in 2017) and geo-political hazard (political protectionism such as the rise of populist politics across the West changing how companies invest in western economies, and economic protectionism where governments use monetary policies to deliberately devalue their exchange rate).
6. The Future’s Bright. The Future is Online.
How will (re)insurers and corporates respond to the rise of Millennials and technology change? Groups across society are joining in social media clamour in great numbers and the great disintermediation of the political and mainstream media class is well under way.
The rise of millennials and activist groups in society is due to their ability to exploit the digital revolution, leading to changes in buying patterns and is re-shaping the world of bricks and mortar. The question for risk managers and CEOs is: “How do we protect, consolidate or change our business model in such an environment?”. One thing is for certain, it is not business as usual.
7. Are you at risk of being trapped in an uncompetitive business?
Dramatic changes in business have unearthed a major gap between traditional approaches to strategy and the way the real world works now. Strategy is now frozen.
It is time to go beyond the very concept of sustainable competitive advantage. Strategy expert Rita Gunther McGrath says organisations need to forge a new path to winning: capturing opportunities fast, exploiting them decisively, and moving on even before they are exhausted. She highlights transient competitive advantage—one example is to incorporate the name “Blockchain” in your brand overnight!
8. What is risk culture?
While boards are taking more of an interest in their company’s internal risk management systems, risk culture, the most crucial aspect of any risk management is being ignored.
Risk culture plays a key role in an organisation’s drive to name and know your risk and can help an organisation’s employees develop a collective understanding of the enterprise, its corporate purpose and risk and compliance rules. It also provides an understanding that signals to all employees “to do the right thing”, which is fundamental to good Enterprise Risk Management (ERM).
What is clear is that the status quo is melting. One question to ask might be:,“is this unfrozen moment melting or transforming into a new state entirely?” The other question to ask is “can we adapt and are we aware?”
The complete paper from Russell Group can be downloaded here.