The long view getting new perspective on strategic risk

The long view
Getting new perspective on strategic risk
A report from the Economist Intelligence Unit

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The long view
Getting new perspective on strategic risk

Contents



About this research

2

Interviewees

3

Executive summary

4

Chapter 1: Bringing the future into focus

6

Chapter 2: A seat for risk at the top table

11

Chapter 3: Roles and responsibilities for risk

16

Conclusion

23

Appendix: Survey results

25

© The Economist Intelligence Unit Limited 2011


The long view
Getting new perspective on strategic risk

About this research

T

he long view: Getting new perspective on strategic risk is an Economist Intelligence Unit report
that explores how companies manage long-term strategic risks in their business. The report is
sponsored by ACCA and Willis.
The Economist Intelligence Unit bears sole responsibility for the content of this report. Our editorial
team executed the online survey, conducted the interviews and wrote the report. The findings and

views expressed in this report do not necessarily reflect the views of the sponsor.
Our research for this report drew on two main initiatives:
l We conducted an online survey of almost 500 executives from around the world in October 2011.
The survey included companies from a wide range of different sectors. All respondents have direct
responsibility for, or influence over, their firm’s risk management, either as CEO or board-level
executive (42%), as chief risk officer or other dedicated risk executive (39%), or as a non-executive
director (19%).
l To supplement the survey results, the Economist Intelligence Unit conducted a programme of
qualitative research that included a series of in-depth interviews with industry experts.
The author was Rob Mitchell and the editor was Iain Scott. We would like to thank all those who were
involved in this research.



© The Economist Intelligence Unit Limited 2011


The long view
Getting new perspective on strategic risk

Interviewees
l Andrew Blau, president of Global Business Network
l Dr Hugh G Courtney, professor of the practice of strategy at the University of Maryland
l Michael Denison, research director at Control Risks Group
l Steve Fowler, chief executive at the Institute of Risk Management
l Javier Gimeno, professor of strategy and Aon Dirk Verbeek chaired professor in international risk and
strategic management at INSEAD
l Peter Johnson, vice-president of strategic planning at Eli Lilly & Co
l Andrew Kakabadse, professor of international management development at Cranfield University
l Anne Nobles, chief ethics and compliance officer and senior vice-president of enterprise risk

management at Eli Lilly & Co
l Richard Pascale, an associate fellow at University of Oxford’s Saïd Business School
l Michael Raynor, director at Deloitte Consulting LLP
l Roland Rechtsteiner, managing partner of the global risk and trading practice at Oliver Wyman
l Martin Reeves, senior partner and managing director at Boston Consulting Group
l Harri Spolander, chief risk officer at Fortum
l Tiger Tyagarajan, chief executive at Genpact
l Freek Vermeulen, associate professor of strategy at London Business School
l Chris Worley, senior research scientist at the Center for Effective Organisations at the University of
Southern California



© The Economist Intelligence Unit Limited 2011


The long view
Getting new perspective on strategic risk

Executive summary

D

uring times of uncertainty and change, current challenges will often take priority over long-term
plans. With the euro zone crisis still in full swing and with developed markets facing the prospect
of a double-dip recession, many business leaders will naturally focus their attention on the immediate
future. They will seek assurances that their short-term financing needs will be met and will pay careful
attention to the quarterly results to detect signs of market deterioration.
This short-term focus is ingrained in institutional structures and thinking. Most chief executives
will enjoy an average tenure of around six years, which means there are few incentives to bring

long-term problems to the top of the agenda. A relentless focus on shareholder value creation has
encouraged business leaders to prioritise short-term profits and share price moves over long-term
performance. Incentive structures have often reinforced this focus by rewarding managers for
meeting short-term targets.
Short-term metrics will always be important indicators of performance, and companies will always
need the ability to take decisions quickly and adapt to immediate opportunities and threats. But a
retreat into the present will reduce a company’s chances of long-term, sustainable success. Business
leaders must therefore combine their skills of adaptability and addressing immediate challenges with a
focus on longer-term risks and opportunities.
At a time when the world is changing so rapidly, it may seem as though any attempt to think about
the future will be doomed to failure. In one respect, this is true. No one can predict the future and the
current pace of change means that it is more difficult than ever to attempt it. But by considering how
different futures might evolve, and ensuring that their organisation is equipped to deal with a range
of outcomes, business leaders will not only be better prepared for the future but will also be more
knowledgeable about their current situation.
This report explores current approaches to long-term strategic planning and risk management.
Based on a global survey of senior executives with responsibility or influence over their company’s
risk management, and a programme of interviews with industry experts and commentators, the
report looks at how companies link risk management with strategic planning. Key findings from this
research include:



© The Economist Intelligence Unit Limited 2011


The long view
Getting new perspective on strategic risk

Long-term risk management is rising on the agenda for many business leaders. Over the past

year, almost one-half of companies say that they have made their risk management more forwardlooking. At the most senior level of the organisation, discussions about long-term prospects and
risks are becoming more frequent. Just over one-third of respondents say that their board and senior
management has increased the time that they allocate to long-term risk analysis.
Links between risk management and strategy are strengthening in many organisations. More
than one-half of respondents say that their risk function plays a formal role in strategy-setting and in
evaluating new market investments. A similar proportion of respondents believe their organisation
is effective at linking risk management with strategy. It is an encouraging sign that companies are
adopting a more rigorous approach to considering the risks associated with their strategy, and that
risk functions are gaining a more influential position within organisations.
Many companies are using scenario planning, but few embed it into the overall strategy process.
A large majority of companies are already using scenario planning and other tools to identify and
assess long-term risks. But few companies are embedding these techniques into their overall strategic
decision-making. Only 20% of respondents say that scenario planning plays a vital role in helping their
company to formulate and adapt strategy in uncertain times. Companies also admit that they may need
to allocate more time to a longer-term view. More than one-half of respondents agree that they should
spend more time thinking about the risks they will face ten years from now.
The time horizons for strategy and risk are often misaligned. Some companies are making longterm strategic plans without a proper consideration of the associated risks. Asked about the maximum
period over which they consider strategic objectives, 58% say that their timeframe is greater than
three years. But asked about the maximum period over which they consider risks, the proportion with
the same time horizon is much smaller, at 44%. In other words, strategy discussions are less likely to
incorporate an assessment of risk as the time horizon increases.
A short-term focus among business leaders can prevent a more thorough assessment of long-term
risks. Asked about the barriers that can prevent their company from taking a longer-term view of its
risk exposure, respondents point to an executive management that is more focused on immediate
risks as the chief culprit. At a time of considerable uncertainty in the external environment, this
short-term focus is understandable. But boards and senior management must move beyond this
myopia and ensure that immediate priorities do not crowd out longer-term strategic planning and risk
management.
Risk functions need to do more to challenge entrenched views of the future. Despite progress
towards a more widespread long-term assessment of business risks, there is a danger of complacency.

Business leaders can often have deeply embedded mental maps of how the future might evolve. It is
notable, for example, that almost one-half of respondents agree that looking into the future merely
tends to confirm what they already know rather than providing them with new information. This
highlights the importance of a risk function with the stature to question strategic assumptions. Twothirds of respondents agree that the risk function needs to do more to challenge management’s view
about how the future might unfold.


© The Economist Intelligence Unit Limited 2011


The long view
Getting new perspective on strategic risk

Key points

n Long-term thinking may be important, but most companies admit that they are not good at it
n Many organisations regard long-term risk analysis as a thought exercise rather than as a key input
to strategy
n Changing business culture and using better tools may help to alter this mindset

Chapter 1: Bringing the future into focus

“I

t is tough to make predictions, especially about the future.” This famous quote, attributed to
the Danish physicist Niels Bohr, neatly summarises the challenge facing companies when they
try to set long-term plans. Despite their best efforts, and despite a plethora of consultants, tools and
methodologies that try to convince them otherwise, the future is inherently unknowable. So-called
“black swan” events, such as the global financial crisis, can quickly unravel even the best-laid plans.
And in an environment of extreme volatility and uncertainty, many executives will no doubt wonder

why they make bets on the future at all.
Prediction may be impossible but this does not mean that thinking about the future is pointless.
Indeed, in sectors with long-term investment horizons, such as energy or pharmaceuticals, it is
absolutely critical to explore a range of potential future scenarios. This vision of the future may not
always be right, but it will at least provide some guidance on the range of potential outcomes for a
particular investment. “If you take your long-term opportunities seriously, then you’d better take the
long-term risks seriously as well,” says Michael Raynor, director at Deloitte Consulting.
Even in sectors with much shorter product life-cycles, such as fast-moving consumer goods, a longterm focus is important. Demographic or generational changes can create new dynamics for business,
which can have a dramatic impact on long-term prospects. Major new threats, such as climate change,
pose considerable long-term uncertainty that will ultimately require a response from every business.
And macroeconomic prospects in emerging markets will have a significant bearing on the success of
new market-based investments.
“If you’re wondering which emerging markets to bet on, you’ve not only got to think about tenyear population trends, but you’ve got to think about ten-year wealth distribution changes too, and
if you don’t, you may end up investing in the wrong market,” says Martin Reeves, senior partner and
managing director at Boston Consulting Group.
Javier Gimeno, a professor in international risk and strategic management at INSEAD, the business
school, argues that long-term risk management can be fundamental to corporate survival. “If you look
at why companies fail, it’s usually because of a failure to identify and mitigate long-term risks,” he
says. “They might miss a change in the market, or a change in technology. It takes so long to react to
these risks that you need to be able to position yourself well in advance. That can only be achieved by


© The Economist Intelligence Unit Limited 2011


The long view
Getting new perspective on strategic risk

Chart 1: How effective are your company’s risk functions at helping to manage the following?
Rate on a scale of 1 to 5, where 1=Very effective and 5=Not at all effective.

(% respondents)

1 Very effective

2

3

4

5 Not at all effective

The pace of external change
8

37

34

16

5

The emergence of new and unexpected threats
10

35

36

15

4

Continuing economic volatility
6

37

40

13

4

34

41

13

4

Increasing business complexity
9

Unpredictable market demand
6

30

42

17

5

14

5

Spotting emerging opportunities
9

30

42

Dealing with long-term challenges such as climate change
6

18

35

23

17

long-term risk management.”

Long-term thinking may be important, but most companies admit that they are not good at it. Less
than one-half of the respondents to our survey think that their risk function is effective at managing
the pace of external change or the emergence of new and unpredictable threats. Only one-quarter say
they are good at dealing with long-term challenges, such as climate change (see chart 1). “Long-term
risks are the most important ones of all but they are also the ones for which the available tools and
solutions are not necessarily optimal,” says Professor Gimeno.
Andrew Blau, president of Global Business Network, a consultancy, believes that one of the reasons
companies struggle with long-term challenges is that they limit their discussions about risk to
factors that are unique to their organisation. While this helps them to deal with operational risks, it
is completely useless at dealing with a major external event, such as the Arab Spring. “When regimes
started to fall in the Middle East and Africa, there were various multinationals with business in the
region who really hadn’t factored this kind of geopolitical risk into their thinking,” he says. “They
assumed that political structures were stable and that the recent past would be a good guide to the
future. It’s important to take a broader view of risk, which is informed by perspectives from outside the
company, and think through different scenarios about how external risks could interact with internal
vulnerabilities in surprising ways.”
The key, then, is not to predict the future or become wedded to a particular vision of what it might
hold, but to consider a range of different possible outcomes and assess how they might affect the
business. “It’s important to keep your options open and ensure that you have the flexibility to respond
to different scenarios because you cannot guarantee any particular outcome in the world,” says Harri
Spolander, chief risk officer at energy company Fortum.
Many companies recognise that they ought to do more to think about the future. Just over one-half
of the survey respondents agree that their company does not spend enough time thinking about the
risks it might face ten years from now (see chart 2). But although companies recognise the importance
of long-term risk analysis, it remains a minority pursuit. Among the companies surveyed for this
report, only around one-quarter say that analysis of risks that may occur more than a decade into the
future is a vital part of their strategy process. A further 44% conduct this kind of analysis, but mainly as
a thought exercise rather than as a key input to strategy (see chart 3).


© The Economist Intelligence Unit Limited 2011


The long view
Getting new perspective on strategic risk

Chart 2: Please indicate whether you agree with the following statements.
(% respondents)

Strongly agree

Slightly agree

Neither agree nor disagree

Slightly disagree

Strongly disagree

Agility and flexibility are more important than the ability to plan for the long term
34

39

15

9 2

Our company does not spend enough time thinking about the risks it might face ten years from now
21

32

24

14

9

The relatively short average tenures of most C-level executives mean that there is little incentive for companies to look at risks more than five years
into the future
22

34

21

14

9

20

9

Looking far into the future tends merely to confirm what we already believe rather than giving us any new information
11

35

25

Investors are not particularly interested in knowing what risks the company will face ten years into the future
17

29

21

22

11

It is better to bring third-party consultants in to help us think about the long-term future because they introduce fresh perspectives
12

32

27

19

10

24

8 2

The risk function in our business needs to do more to challenge management’s view about how the future might unfold
22

44

Chart 3: What do you see as the value of risk analysis that considers events more than one decade into the future?
(% respondents)

It is a vital part of the strategy process in our business.

24

We do this, but more as a thought exercise than as part of the strategy
process—it is difficult to incorporate it into our strategic planning.

44

We do not do it because we do not believe it has value.

32

Pressure to think short-term
Long-term risk management is inherently challenging. As they look further out to the future,
companies will be dealing with uncertainty, rather than risk. In his 1921 treatise, Risk, Uncertainty
and Profit, the economist Frank Knight defined risk as randomness with knowable probabilities, and
uncertainty as randomness where the probabilities are unknown. “Long-term strategy over periods
of more than ten years is much more about uncertainty than risk,” says Freek Vermeulen, associate
professor of strategy at London Business School. “You really have no clue what the world is going to
look like ten years from now so it can be somewhat dangerous to start measuring the probabilities of a
future that may well never materialise.”
By extending their risk models further into the future, companies must be aware that the data being
used to populate them are increasingly unreliable. As financial institutions learned during the recent

crisis, an over-reliance on models can be dangerous. “You’ve got to be careful not to make modelbased decisions without reflecting on the quality of the input and output to that model,” says Roland
Rechtsteiner, managing partner of the global risk and trading practice at Oliver Wyman.
Besides the inherent challenges of long-term risk management, there are good reasons that
executives may be reluctant to focus too much energy on the distant future. Over the past three years,
volatility in financial markets and a highly unpredictable economic environment have made it difficult
to anticipate what will happen from week to week, let alone ten years into the future.


© The Economist Intelligence Unit Limited 2011


The long view
Getting new perspective on strategic risk

Chart 4: What, if any, do you consider to be the main barriers that prevent your company from taking a longer-term view of its
risk exposure? Select up to three.
(% respondents)
Executive management is more focused on immediate risks
41

Pace of business is too fast to make long-term risks worth considering
36

Doubts about its risk value
33

Lack of expertise in long-term risk analysis
31

Investor focus on short-term performance means that management does not spend much time on longer-term issues

20

Lack of available tools
18

Lack of time and resources
17

Incentive structures are geared toward shorter-term issues
16

Relatively short tenure of most senior executives
7

Other, please specify
3

We do take a longer-term view of our risk exposure
8

At a time when many companies have been more worried about survival than how they will be
positioned a decade from now, it is perhaps inevitable that long-term thinking slips down the priority
list. Asked about the barriers that prevent their company from taking a longer-term view of its risk
exposure, respondents point to a focus on more immediate risks among executive management as the
key factor (see chart 4).
When companies are confronted by short-term challenges, there is a temptation to turn inwards and
fix the problem by increasing efficiency or eliminating redundancy. But as Mr Reeves points out, this can
blind companies to the real issues. “The human reaction when faced with falling returns or volatility is
to shorten the time horizon and seek out short-term tactical gains through increased efficiency,” he
says. “At the very moment when companies need to look ahead, they do exactly the opposite.”

Almost three-quarters of respondents agree that agility and flexibility are more important
than the ability to plan for the long term (see chart 2). But while quick wits are important, these
capabilities alone are not sufficient to ensure long-term success. “Agility starts with a longer view
because if I haven’t thought about the future, then I won’t have a range of ideas on which to draw
when the unexpected happens,” says Chris Worley, senior research scientist at the Center for Effective
Organisations at the University of Southern California. “Instead, I have to make them up in the
moment, which means that my decisions will tend to be focused on a very narrow range of options.”
More long-standing, institutional barriers can also prevent a longer-term focus. Pressure from
investors and analysts can encourage companies to focus on quarterly results at the expense of longerterm performance. “The fact that a long-term perspective is beneficial to the company is easy to grasp
but it’s challenging to implement,” says Dr Hugh G Courtney, professor of the practice of strategy at
the University of Maryland. “There are lots of day-to-day pressures from the financial markets that
make it difficult to stand strong and have the courage to prioritise a longer-term perspective over the
short-term issues.”


© The Economist Intelligence Unit Limited 2011


The long view
Getting new perspective on strategic risk

Management incentive structures can reinforce this focus on short-term performance. Rewards are
often geared towards short-term performance and there is only limited allocation towards longer-term
ones. There is an assumption that CEOs will only last a few years in a role, and this is often reflected in
their pay structures. More than one-half of respondents agree that this relatively short tenure means
there is little incentive for companies to consider long-term risks (see chart 2).
But despite these challenges—which are both intellectual and structural—the ability to take a
longer-term focus is becoming a vital capability for survival and success in an uncertain environment.
The goal is not to predict the future but to prepare for it by building up the capability to respond
to unexpected events. “The strategy that you come up with may well need to change, but at least

you’ve gone through the process of thinking through various scenarios,” says Professor Vermeulen.
“This makes you better equipped to put together an appropriate response when something
unexpected happens.”

Genpact: Staying one step ahead of change
In a young, fast-changing industry, the ability to respond quickly
to evolving customer needs is vital. But by identifying the early
indicators of change, companies in highly dynamic sectors can gain
a longer-term perspective that gives them an advantage over their
competitors.
Genpact is a business process management consultancy that
began its life as a division within GE. It operates in a fast-growing
sector that is barely more than a decade old. In such a dynamic
environment, the ability to spot change early can increase the time
available to formulate a response.
Tiger Tyagarajan, Genpact’s chief executive, emphasises the
importance of a balance between agility and foresight. “You have
to have your antennae out and be able pick up signals of upcoming
change faster than competitors,” says Mr Tyagarajan. “Our aim is
to take advantage of the distributed intelligence throughout the
organisation and identify signals of possible change. To do this, we
need to be close to our clients and the market.”
Despite the pace of change in its sector, Genpact spends a lot of
10

time thinking about potential risks and how they could affect its
business. “We run ‘what if’ scenarios in different business lines and
consolidate these across the company,” explains Mr Tyagarajan.
“We discuss, for example, the implications of an increase in global
protectionism and then try to think about how that might affect our

business.”
Where possible, Genpact frames these scenarios as opportunities
as well as risks. “We look at changes in our market and think about
how we might be able to capitalise on them,” says Mr Tyagarajan.
“If we can identify change and then position ourselves to drive the
evolution of a new market, then that is much better than simply
mitigating a risk.”
Although Mr Tyagarajan believes that Genpact has embedded
risk thinking at the heart of its business, he feels that the company
needs to do more to think about long-term risks. “We are a very
young company in a young industry,” he says. “More importantly,
the pace of change is so fast that it can drown out efforts to think
about the very long term. But we are continuing to push our
horizons outwards. We are on a journey but we still have some way
to go.”
© The Economist Intelligence Unit Limited 2011


The long view
Getting new perspective on strategic risk

Key points

n Risk functions continue to take on bigger roles in their companies’ strategy development
n However, risk management is still primarily viewed as an operational, rather than strategic, function
n Some companies are trying a discovery-based approach, discussing risks and opportunities side by side
and making decisions based on rigorous argument

Chapter 2: A seat for risk at the top table

S

trategy development and risk management should go hand in hand. As companies make long-term
plans and decide on major new investment initiatives, a rigorous and formal understanding of the
risks that could derail that strategy is essential.
Among the companies surveyed for this report, it is encouraging to note the substantial role played
by the risk function in key strategic activities. Almost six in every ten respondents say that their risk
function plays a formal role in setting overall corporate strategy, and more than one-half say that
risk managers play a formal role in evaluating new market investments (see chart 5). Respondents
generally think that the links between risk and strategy are strong, with more than six out of ten rating
the alignment between the two as effective.
This is a different picture from one year ago, when we asked the same question in a previous report
in this series. Then, the proportion of respondents who said that they were involved in these activities
was considerably smaller. The overall message seems to be that risk functions are taking on an
increasingly significant role in strategy development.
But despite this progress, other findings suggest that there is still a gulf between risk management
and strategy. Asked about the maximum period over which they consider strategic objectives, 58% say
Chart 5: In which of the following activities does your organisation's risk function play a role formally? Please select all that apply.
(% respondents)
Setting overall corporate strategy
58

Providing analysis to support corporate strategy
57

Evaluating new market investments
53

Evaluating M&A opportunities
43

Evaluating new geographical investments
41

Business restructuring
41

Capital raising
37

Performance management
34

Recruitment of senior executives
18

11

© The Economist Intelligence Unit Limited 2011


The long view
Getting new perspective on strategic risk

Chart 6: When formulating long-term plans for your business, what is the maximum time horizon over which you consider
strategic objectives or risks?
(% respondents)

Strategic objectives

Risks

One year
8

20

Up to three years
33

36

Up to five years
25

37

Up to ten years
11

14

Up to 20 years
3

4

More than 20 years
3

4

that their timeframe is greater than three years. But asked about the period over which they consider
risks, the proportion with the same time horizon is much smaller, at 44% (see chart 6). In other
words, a sizeable proportion of companies are considering long-term strategic plans beyond a certain
timeframe without a proper consideration of the associated risks.
What is causing this gap between strategy and risk? A common problem is that risk and strategy
are not always well-aligned. Although they say they are involved in strategy, risk officers are often
brought into the process at a late stage. By this time, senior executives are looking for information
that endorses, rather than challenges, their strategy. “Chief executives don’t want to hear the risk
arguments because they feel that it undermines the strategic position that is driving the company,”
says Andrew Kakabadse, professor of international management development at Cranfield University.
“Even in organisations where there is a high awareness of risk, it does not form part of the strategic
debate and difficult issues are prevented from coming to the surface.”
This problem often stems from a view that risk management is an operational, rather than strategic,
function. In recent years, many companies have become much more effective at supply chain risk
management, business continuity planning, financial risk and a whole host of activities that help
the organisation to become more resilient. But these are tactical risks, and companies’ strategic risk
capabilities are often less well-developed. “When it comes to fundamental strategic decision-making,
uncertainty and risk are not analysed nearly as rigorously or systematically as the day-to-day aspects
of risk management,” says Mr Courtney. “That’s surprising, because the strategic risks are often the
biggest bets that a company will make.”
Other findings from our survey also point to a gap in capabilities. When asked what they thought
were the most important objectives of the risk function, respondents point to the identification of new
and emerging risks (see chart 7). But when asked how they rate the effectiveness of their organisation
at various activities, anticipating and measuring emerging risks is seen as the biggest weakness (see
chart 8). The problem, it seems, is that, despite recognising the importance of a long-term, strategic
approach to risk management, companies find this extremely difficult to put into practice.
12

© The Economist Intelligence Unit Limited 2011


The long view
Getting new perspective on strategic risk

Chart 7: What, in your opinion, are the most important objectives of the risk management function?
Please select no more than three objectives.
(% respondents)
Identifying new and emerging risks
59

Ensuring corporate survival
38

Enabling managers to make better business decisions
31

Minimising losses
29

Communicating key risks to stakeholders
25

Measuring and monitoring risk
25

Ensuring regulatory compliance
22

Enabling more efficient resource allocation
17

Instilling risk culture in the organisation
16

Setting and monitoring the organisation’s risk tolerance
13

Other, please specify
1

Chart 8: How would you rate the effectiveness of your organisation at the following activities?
Rate on a scale of 1 to 5, where 1=Highly effective and 5=Not at all effective.
(% respondents)

1 Highly effective

2

3

4

5 Not at all effective

Linking risk management with corporate strategy
16

40

32

10 2

Ensuring that risk information is timely and up-to-date
10

39

34

15 2

Ensuring quality and availability of data
8

36

40

14 2

Instilling awareness of risk throughout the organisation
11

32

37

17

3

Communicating risk information to investors
12

31

35

16

6

Managing regulatory compliance
19

40

29

9 2

Anticipating and measuring emerging risks
7

35

41

15 1

Recruiting and retaining appropriate risk expertise
5

24

37

25

8

Ensuring board level awareness of key risk issues
15

42

29

11 2

Many companies understand these shortcomings and are working hard to resolve this problem.
Almost one-half of all respondents say that, in the past year, they have increased the extent to which
risk management is forward-looking. Just over one-third have increased the time that the board and
senior management allocates to long-term risks (see chart 9). “What is starting to appear on the
horizon is a greater integration between risk and strategy, and a more holistic approach that looks
across the various silos that have been used to organise thinking about risk in the past,” says Mr Blau.
A more strategic approach to risk requires companies to integrate it with the strategy process,

ensuring that any major investments or plans are tested and challenged across all the key risk
categories. “Rather than deciding on a strategy then testing it for risks and uncertainties afterwards,
companies should approach their strategic discussions in a more exploratory way where they are
13

© The Economist Intelligence Unit Limited 2011


The long view
Getting new perspective on strategic risk

Chart 9: Over the past year, what changes have you made to the following aspects of your risk management practices?
(% respondents)

Increase

No change

Decrease

Extent to which risk management is forward-looking
49

50 1

Time horizon over which we consider risks
27

67

6

Resources allocated to risk analytics
29

67

4

Resources allocated to risk modelling
22

73

5

Board and senior management time allocated to long-term risk analysis
37

59

4

67

4

Investment in scenario planning and other long-term risk management tools
29

Formal links between risk management functions and overall corporate strategy
33

64

3

not just testing a chosen option but working with senior management throughout the process,” says
Mr Courtney.
This more strategic assessment of risk requires a systematic approach to thinking through the
implications of a particular decision. “Companies need to accept that, with every type of strategic
initiative, they are actually making a risk/return decision,” says Mr Rechsteiner. “Once you accept that
every strategic move has a different risk/return implication, then you can have the whole discussion
around what level of risk you are willing to take, the long-term outlook for investments and how a
particular strategic initiative fits in with your overall portfolio.”
In addition to taking this more structured approach to considering risks, leadership teams may
also need to change the cultural framework by which they make decisions. Mr Courtney points out
that many organisations use an advocacy-based, rather than a discovery-based, method to reaching
strategic decisions. According to the former approach, members of the executive or non-executive
team make their pitch, and those with the strongest influence or argument win. But in a discoverybased approach, the idea is to decide on the best outcome through a process of dialogue, where the
risks and opportunities are discussed side by side and decisions are made on the basis of rigorous
argument. “The tools that are available to manage risk and uncertainty are getting better all the time,”
says Mr Courtney. “Ultimately, what needs to change are the culture and mindset issues that will enable
a more rigorous assessment of risk as part of the strategy process.”

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© The Economist Intelligence Unit Limited 2011

The long view
Getting new perspective on strategic risk

Challenging beliefs at Eli Lilly
In many companies, risk management remains a tactical activity
that focuses on identifying and mitigating operational threats. Even
in companies that have put in place enterprise risk management
programmes, the focus tends to be on internal issues, rather than a
broader strategic discussion of risks and opportunities.
Eli Lilly & Co, the US-based pharmaceuticals company, is one
of the few companies to have embarked on the next stage of
the journey—to connect and integrate risk management with
the company’s long-term strategic decision-making. Given the
long-term nature of the pharmaceutical industry, with its multidecade drug development timetables, it is unsurprising that Lilly
recognises the importance of a long-term perspective. “Looking at
risks more than a decade into the future is an inherent part of our
business,” says Peter Johnson, the company’s vice-president of
strategic planning. “We have to make choices today about the kinds
of diseases that we want to focus on and the value that we think
we could get from developing a product that would be launched 12
years from now.”
The company encourages managers to think not just about
the downsides of risk, but the opportunities that may be inherent
in those risks as well. “It’s a hard concept for people to grasp
initially,” says Mr Johnson. “But when they think about it, they can
understand that we are trying to imagine a changing situation that
may look like it’s a downside, but in fact represents an opportunity

15

to change the way we do business.”
Taking a longer-term perspective on risks helps to challenge
assumptions about what the future may bring. Mr Johnson believes
that this is important, because our beliefs about the future are rarely
explicit. “These implicit beliefs can create a lot of dissonance when
you’re making strategic decisions,” he says. “The very process of
talking about the future will help a management team to understand
that their current strategy is dependent on a set of beliefs about the
way the world is going to work.”
Lilly’s approach to dealing with strategic risk has become
more qualitative over time. The aim is to understand the four
or five “seminal beliefs” that are the lynchpin of the company’s
strategic choices. “By identifying these beliefs, we can think
about what would happen if they were different or wrong,” says Mr
Johnson. “Even if you don’t make any explicit changes, you start to
understand the choices you’ve made in a deeper way.”
While Lilly’s strategy team is centralised, the risk function
operates as a virtual team. Anne Nobles, the company’s chief ethics
and compliance officer and senior vice-president of enterprise
risk management, stresses that it is important to get input
from different parts of the organisation rather than rely on an
overly centralised risk function. “Our approach is to pull people
together from across the business who have a range of expertise
and knowledge,” she explains. “This enables us to draw on the
backgrounds of a diverse team who understand the business
dynamics but from slightly different perspectives. This is a vital tool
for helping us to think strategically about the long term.”

© The Economist Intelligence Unit Limited 2011

The long view
Getting new perspective on strategic risk

Key points

n Senior managers can become over-confident in their abilities to ascertain future risks
n Boards and risk managers need to be willing to challenge management and ensure that there has been a
proper discussion of risk as part of the strategy-setting process
n Scenario planning can be a useful tool—but it can be dangerous if it is not done properly

Chapter 3: Roles and responsibilities for risk

I

n the 1950s, the Canadian-born psychologist Elliott Jaques developed a theory called the Requisite
Organisation. One of its arguments was that time horizons should increase in line with seniority
in a company. A low-level sales executive might worry about reaching his targets for the week, while
a marketing director might be focused on plans for the next year. With each layer of hierarchy in the
organisation, time horizons should get longer. Those at the top of the company, the executive and
non-executive management, should have the longest time horizons of all.
Our survey suggests that this is broadly the case. The chief executive is the individual who is most
likely to be responsible for exploring the potential impact of long-term risks, followed by the executive
board. Very few companies delegate responsibility for long-term thinking to strategy departments or
heads of business units (see chart 10).
Chart 10: Who in your company is responsible for exploring the potential impact of long-term risks on corporate strategy?
Please select one only.
(% respondents)
Chief executive officer
30

Executive board
19

Chief risk officer
9

Board-level risk committee
8

Chief financial officer
8

Strategy department
6

Heads of business units
5

Cross-functional committee below board level
4

No one has overall responsibility
4

Non-executive board
2

We do not conduct long-term risk management
3

Don’t know
1

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© The Economist Intelligence Unit Limited 2011


The long view
Getting new perspective on strategic risk

But despite the prevailing view that the executive management and board are ultimately
responsible for strategic risk management, there are barriers that can prevent them from fulfilling this
role effectively. For one thing, the pace of change and complexity of the business environment means
that it can be difficult to know where to start. “The challenge for people at the top is how you ration the
bandwidth that you’ve got to pick those few themes that you think could be really consequential,” says
Richard Pascale, an associate fellow of Saïd Business School. “The danger is that certain risks simply
fall off their radar and become a tick-box exercise rather than something of substance.”
Michael Denison, research director at Control Risks Group, highlights the importance of ensuring
that long-term strategic discussions take place within a defined framework. “There’s no point just
shoving people into a room and asking them to talk about what’s going to happen in 20 years,” he says.
“There has to be some structure and organisation to the kind of things you are thinking about. It’s
within that structure that you allow people to explore the types of issues that might occur.”
Chief executives and other members of the leadership team need the strength of character to
support a long-term focus among their team and reports. Asked to name the steps that are needed to
ensure a better alignment between risk management and strategy, respondents point to a stronger
risk culture and awareness among business units (see chart 11). This has to come from the top. “There
are a lot of CEOs who will acknowledge the issue but unless they are willing to pull the team aside and
tell them stop worrying so much about short-term issues, then it will be very tough to get longer-term

thinking on the agenda,” says Mr Worley.
In many companies, the management team is far removed from the coalface of the business, and
this means that information about risks can be filtered out before it reaches them. It is notable that
more than four out of ten C-level respondents agree that looking into the future merely tends to
confirm what they already know rather than providing them with new information. In other words,
they have deeply embedded mental maps about how the future will unfold. “People are systematically
over-confident in many aspects of life, but particularly in their ability to predict the future,” says Mr
Courtney. “We rarely see change until after the facts and we become anchored on the status quo, which
Chart 11: What steps does your organisation need to take to ensure better alignment between risk management and strategy?
Select all that apply.
(% respondents)
Stronger risk culture and awareness among business units
50

Greater risk management expertise at executive board level
45

Stronger commitment to enterprise risk management
44

Risk management needs to be more forward-looking in its approach
34

Risk managers need to present themselves more effectively as business enablers
33

Greater risk management expertise at non-executive board level
32

Perception of risk management as a “support function” needs to be eroded

29

Better knowledge of the business among risk professionals
27

Other, please specify
2

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© The Economist Intelligence Unit Limited 2011


The long view
Getting new perspective on strategic risk

frames how we view signals from the market and from competitors.”
Business leaders who are unwilling to hear dissenting opinions and who surround themselves with
teams who share their viewpoint are particularly unlikely to miss the early indicators of new risks
and opportunities. “You might find that one manager perceives something as a risk but another will
not,” says Professor Gimeno. “The danger, then, is that something that is an early warning tends to
be suppressed because nobody wants to recognise those voices that are dissenting from the majority
of opinion.”
The non-executive board also has an important role to play in ensuring that a focus on the longer
term is maintained. “With the responsibility for the long-term health of the organisation sitting
squarely in their lap, the board needs to push management to think beyond the next quarter or fiscal
year,” says Mr Worley. “The more they can get involved in encouraging management to think longer
term, the better they will be fulfilling their own responsibilities.”
Rather than be compliant and simply sign on the dotted line, boards need to be willing to challenge
management and ensure that there has been a proper discussion of risk as part of the strategy-setting

process. “You want people on the board who are willing to play devil’s advocate,” says Professor
Gimeno. “It’s important to have dissenting opinions about what the future will look like, but all too
often what you get is support for strategy rather than challenge.”
Although board members may not be experts in risk management, having at least one member who
can take responsibility for long-term risks helps to ensure an independent perspective and a challenge
for management. Survey respondents see board-level risk expertise as one of the key requirements for
ensuring a better alignment between risk and strategy (see chart 11). “There should be board members
or executives whose responsibility is to assess risk who report to the chairman,” says Professor
Kakabadse. “This ensures that their views cannot be blocked by executive management.”

The role of the risk function
Chief risk officers and risk functions continue to grow in influence and stature within many
organisations. More than one-half of respondents say that risk management will play a bigger role in
helping the company to meet its organisational priorities compared with a year ago. Among financial
services companies, this proportion rises to 63% (see chart 12).
Chart 12: How would you describe the contribution of risk management to meeting your organisational priorities in the coming
year, versus the past year?
(% respondents)

Risk management will play a bigger role than a year ago
Risk management will play a smaller role than a year ago
Risk management will play the same role as a year ago
Don’t know

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© The Economist Intelligence Unit Limited 2011

55
5

38
2


The long view
Getting new perspective on strategic risk

Chart 13: How would you rate the quality of managerial engagement between the risk function and the following individuals
or groups when considering long-term risk issues?
Rate on a scale of 1 to 5, where 1=Very high and 5=Very low.
(% respondents)

1 Very high

2

3

4

5 Very low

Not applicable

Chief executive officer
44

30

18

4 2 0

Chief financial officer
31

36

19

71

6

Other executive board members
12

33

31

12

3

9

Non-executive board
5

25

29

20

6

15

Head of business units
10

30

31

15

5

8

Other business managers
3

18

32

22

122

13

Chart 14: How frequently does your risk function report in writing to the board?
(% respondents)
Every quarter
34

Monthly
22

Every six months
13

Annually
10

Weekly or more often
6

Less than annually
5

Never
10

Risk functions are also forging strong relationships with the most senior levels of the organisation.

More than three-quarters of respondents say that the quality of managerial engagement between the
risk function and the chief executive is high, and just over two-thirds offer a similar assessment for the
relationship with the chief financial officer (see chart 13).
The frequency of engagement also seems to be fairly high. Just over six out of ten respondents say
that their risk function reports to the board in writing either quarterly or more frequently (see chart
14).
But despite this progress, there can still be a perception that risk functions play a supporting role in
business, rather than a strategic one. “There continues to be a frustration among risk managers that
they are seen as a necessary part of the business rather than as an integral one,” says Mr Denison.
Two-thirds of respondents agree that risk functions need to do more to challenge management’s
view of what the future might hold. It takes huge strength of character for CROs to break free from
traditional perceptions of the risk function and play this role. But having stronger representation of
risk at a senior level could be hugely valuable. “A really effective CRO needs to be someone who has
the stature to take on the mindset and cultural issues in the C-suite,” says Mr Courtney. “If they can
influence decisions at that level, or even change the way the board makes those decisions, then they
will have made a significant contribution.”
So how should risk mangers ensure that they play a role in key strategic decisions? Steve Fowler,
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© The Economist Intelligence Unit Limited 2011


The long view
Getting new perspective on strategic risk

chief executive of the Institute of Risk Management, argues that risk officers need to put themselves
forward and take a proactive approach rather than waiting to be asked for input. “The most successful
risk managers will deliberately find out what the chief executive’s pet project is and will then review the
risks and responses to ensure the project succeeds, rather than fails,” he explains.
It is also important for them to speak the language of business, rather than hide behind complexity

and obfuscation. “Risk managers do themselves a great disservice if they start talking in technical
jargon,” says Mr Fowler. “Chief risk officers need to speak the language of the business they are in,
which means understanding finance, understanding the financial impact of risks, both upside and
downside, and making sure that they communicate with the key decision-makers in the firm on the
same level.”

A broader discussion
Better alignment between senior management and the risk function is important, but this nexus
should not be the only source of information about long-term risks and opportunities. “Most of the
risks that can really cause companies to come unstuck are integral to the business, so although it
makes sense to have an independent risk function to ensure that checks and balances are in place, it
doesn’t always makes sense in a context of where the knowledge to act on those risks actually lies,”
says Mr Reeves.
By instilling a broader culture of risk across the organisation and ensuring an awareness of risk
concepts across the broader business, companies will have a better chance of spotting new threats
and responding appropriately. At the same time, the discussion of risk moves from one that primarily
concerns downside threats to one that accompanies upside opportunities as well. “In the future,
identifying and assessing risk should be a strategic conversation among multiple parts of the
organisation” says Mr Blau. “This enables the company to develop a holistic view of risk that spots
potential threats as well as opportunities for new growth and advantage.”
In this way, risk is no longer compartmentalised in the risk function, but becomes the responsibility
of everyone across the business. While the technical aspects of risk will remain the responsibility
of risk managers, the identification of risk, and the conversations about its implications, can take
place anywhere in the company. “Large organisations have tremendous numbers of eyes and ears on
the ground in places around the world, and finding ways to tap that distributed perspective on the
challenges that their business is facing is extremely valuable and important,” adds Mr Blau.

20

© The Economist Intelligence Unit Limited 2011

The long view
Getting new perspective on strategic risk

Scenario planning takes centre stage
Nearly 40 years after Royal Dutch Shell first
commercialised its use to enable a better
understanding of its business at the time of major
oil price shocks, scenario planning has become an
integral part of the risk management toolkit in many
companies. Among our respondents, 72% say that they
currently use scenario planning, while a further 19%
say that they plan to do so in future (see chart 15).
“Scenario planning helps companies to develop a
more complete map of possibilities so that they are
able to pick up weak signals on the periphery,” says
Mr Pascale. “It’s a very helpful exercise to stretch
executives beyond the dimensions that they normally
focus on and to push them to become more nimble in
their response to weak signals as they start to move
to the centre.”
But despite its widespread adoption, companies
take different approaches to aligning scenario
planning with their overall strategy. While 20% of
respondents say that it plays a vital role in helping

them to formulate and adapt their strategy in
uncertain times, a larger proportion—46%—see it
merely as a useful input, rather than an integral part

of the process. A further 18% see it as an interesting
thought exercise but not something that has a major
bearing on their strategy (see chart 16).
This assessment may suggest that companies
are not making best use of their scenario planning
exercises, but Mr Courtney argues that companies do
not need to align their scenarios with every decision.
“Scenario plans don’t necessarily need to inform the
big strategic decisions on the day, but they do begin
to frame the longer-term opportunities and threats
that companies might face,” he explains. “They start
to lay the groundwork for the investment paths that
companies might need to explore.”
While undoubtedly a useful input to the strategy
process, scenario planning also carries its own
risks. If executives see it as a way of predicting the
future, or to validate particular strategies, then it

Chart 15: Which of the following tools does your company use or intend to use to identify and assess long-term risks?
Please select one for each row.
(% respondents)

Currently use

Intend to use

Do not intend to use

Scenario planning
72

19

10

Third-party forecasts
60

19

22

Risk mapping
51

31

18

Horizon scanning
43

29

29

Other, please specify
22

14

63

Chart 16: Which of the following statements best describes your company’s approach to using scenario planning?
(% respondents)
It is a useful input to helping us formulate and adapt our strategy in uncertain times
46

It plays a vital role in helping us formulate and adapt our strategy in uncertain times
20

It is an interesting thought exercise but does not have a major bearing on our strategy process
18

It helps us to assess the robustness of our business model and strategy over the longer term
7

It helps us better anticipate the unexpected
5

We do not think that scenario planning has any real relevance to our business
4

21

© The Economist Intelligence Unit Limited 2011


The long view
Getting new perspective on strategic risk

can lead companies down the wrong course. “If you
approach scenario planning as a means to select the
most optimal strategy based on the probabilities
you ascribe to different scenarios, then it’s useless
at best and probably very dangerous because you
are almost certain to be wrong,” says Professor
Vermeulen. “You’re better off not doing scenario
planning at all than doing it dogmatically.”
Rather than be seen as a way to predict the future,

22

scenario planning should be considered as a way to
equip the company for multiple possible outcomes.
“Even though you may not be describing an event
which is going to happen, you are actually thinking
about the processes of contingency planning,”
says Mr Denison. “So the content may not be quite
right but you’re instilling a mindset which means
that something is not going to take you completely
by surprise.”

© The Economist Intelligence Unit Limited 2011


The long view
Getting new perspective on strategic risk

Conclusion

E

fforts to build stronger links between risk management and strategy are at a relatively early
stage. But there are encouraging signs of change. Risk management is outgrowing its origins
as a tactical, operational discipline and becoming more tightly embedded with the strategy-setting
process. Business leaders are opening the doors of the boardroom and becoming more willing to be
challenged by the chief risk officer. Governance changes that enshrine the independence of the risk
function are making this process even easier.
Based on our research into long-term risk, we have identified ten capabilities that companies
should develop to ensure that they have a closer alignment between their strategic decisions and risk
management:
Prediction is impossible, but thinking about the future is still important. Companies that set
their strategy based on a deterministic view of the future are doomed to fail. Instead, the goal of risk
management should be to explore multiple potential scenarios and test strategic options against them.
Business leaders must be willing to challenge their own assumptions about the future. Deeply
held mental models and a tendency towards groupthink mean that leadership teams will often share
assumptions about how the future will unfold. As part of the strategy process, business leaders should
be willing to have these assumptions challenged.
Companies must accept that strategies are hypotheses. The management writer Henry Mintzberg
said that strategies are to companies what blinkers are to horses. In an uncertain world, companies
must accept that strategies are hypotheses, and test them regularly using robust risk management
techniques and dialogue.
Risk should be fully integrated with the strategy process. If risk officers are only brought into the
strategy process once the key decisions have been made, it makes it very difficult for them to challenge
executive management. Instead, risk should be integrated with strategy and be able to provide
independent challenge to management assumptions throughout the process.
Adopt a discovery-based model for strategy development. In many companies, strategy is
determined on the basis of influence and power. Rather than adopt this advocacy-based model,
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© The Economist Intelligence Unit Limited 2011


The long view
Getting new perspective on strategic risk

companies should shift to a discovery-based one, in which a process of dialogue and discussion is used
to arrive at optimal strategy.
Discussions about the future need structure. Informal discussions about the long-term future will
have limited value. Instead, companies need to adopt a structured approach, using techniques such as
scenario planning and horizon scanning, to explore potential outcomes.
Risk should be the responsibility of everyone across the business. Companies should work hard to
overturn perceptions that risk is the responsibility of risk functions. By building a broader culture of
risk and distributing awareness across the entire organisation, companies stand a much better chance
of identifying new and emerging threats at the periphery.
Boards need to steer senior management towards a longer-term focus. As the stewards of the
company’s long-term prosperity, non-executive directors should play an active role in preventing
executive management from becoming too bogged down in immediate priorities.
Risk management needs independence to give it stature. Chief risk officers should play a vital
role in challenging management and applying a risk filter to strategic decisions. But if they report to
executive management, it is difficult for them to do this. Companies should therefore ensure that risk
officers report directly to the board. This will give them the stature and independence they need to
challenge executive management.
Discussions about risk can uncover opportunities as well as threats. Risk and opportunity are
two sides of the same coin. By integrating risk with strategic planning, companies can identify new
opportunities, as well as threats, and find new ways of doing business that can give them long-term
competitive advantage.

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© The Economist Intelligence Unit Limited 2011