Global Risk Report 2014–10 Suggestions for Improving Risk Response


Introduction

The first two parts of the Global Risk Report 2014 deal with processes that are analogous to some of the planning processes of Risk Management used in project management: Plan Risk Management, Identify Risks, and Perform Qualitative and Quantitative Risk Analysis. Part Three of the Global Risk Report 2014 deals with the next process, which is Plan Risk Responses.

The last post dealt with some of the specifics of risk responses for managing catastrophic, global risks.   This post discusses 10 suggestions the Global Risk Report 2014 makes for improving risk responses.

1.  Have firms nominate Chief Risk Officers (CROs)

To show that the formulation of risk responses is a top priority of firms or even national governments, the World Economic Forum (WEF) recommends the establishment of C-level risk officers of CROs to change the short-term focus on quarterly profits into long-term focus on sustainable growth with preparedness for setbacks caused by global risks.

2. Have governments nominate cabinet-level national risk officers

The equivalent to CROs in firms would be a cabinet-level national risk officer, a Secretary of Risk to use the parlance of the US Government.   Financing of risk-financing practices would be done in cooperation with the Secretary of the Treasury, and wargame-type simulations would be done in cooperation with the Secretary of Defense.

3.  Change executive remuneration to contingency bonuses

To change the thinking of executives for a company, rather than rewarding C-level executives for better quarterly performance, have the bonuses be awarded on a more long-term contingency basis.    Will the policies the executives initiate now still be profitable to the company, say, 5 years from now?    This would force them to think beyond their “term of office”, so to speak.

4.   Spread risk-response costs over time

Since the more catastrophic risks are those that will continue to persist for some time, it makes sense to amortize the investments in measures that enhance resilience to those risks over time as well.    This will make the upfront payment for those measures more palatable for senior management.

5.  Negotiate longer-term insurance contracts

In parallel with the technique mentioned in paragraph #4 above, which is predicated on the assumption of risk and the contingency measures to handle them, transferring risk to a third party through insurance can also be used as a risk strategy.   In this case, a firm could negotiate longer-term insurance contracts that have lower premiums to reflect investment in protective measures.   As it says on p. 47 of the Global Risk Report 2014, “If the premium savings exceed the annual costs of a long-term loan to finance the investment, the mitigation measures will be cost-effective and financially attractive to undertake.”

6.  Offer longer-term loans to cover investments in risk resilience

If you are trying to help countries take steps to reduce risks from adverse events, offering longer-term loans to cover investments in resilience to those events would help foster longer-term thinking.    These measures of resilience would include such things as improving building codes to cope with floods, earthquakes, and other natural disasters.

7.  Have risk officers dramatize risk events

Risk officers should learn to communicate not just with abstract statistics, but with methods of communication that relate to people who have other preferences for getting information.   An example in California was the Great California Shakeout held on October 28, 2012, an event which dramatized what might occur doing a major earthquake.   It offered an opportunity for ordinary citizens as well as emergency responders to consider improving their preparedness for a potentially damaging earthquake.

8.  Have risk officers help avoid “risk perception” errors

Most people overemphasize the future probability of occurrence of risks that have recently happened, or those which have great impact on human life and have been extensively covered in the news.    The problem with the latter, for example, is that there is that there is a concomitant underemphasis on risks that are more likely to occur, although they have lesser impact.    Everyone worries about being hurt by buildings or highways that collapse in an earthquake.   But out of those people, how many have emergency water or food rations stored in their house or apartment?   Running out of food and water is a statistically much more likely event to occur than having one’s house fall on you, and yet it is a contingency for which too few people prepare.

9.  Have risk officers use discussion of risks to empower employees

One of the reasons why companies do risk response strategies is so that the management can have peace of mind knowing that there is something that can be done in case a risk occurs.   The same psychology holds true with individuals, so risk officers should take advantage of this and use this as an aid to starting the conversation with all members of a firm about how to take an active part in the mitigation of risk.

10.  Have risk officers use checklists to help firms brainstorm about risks

Identification of risks is as fundamental to the success of a project as identification of the technical requirements of that project’s final product.   And in a similar way, the process of gathering these risks should be parallel to that of gathering requirements:   in needs to be done with as many stakeholders as possible; not just those on the project itself, but by those affected by the project in some way.

Checklists can be a way of breaking down what is a conceptually difficult topic for people such as risk into a form that can cause them to break the topic down into concrete questions that are more easily answered.

These suggestions from the Global Risk Report 2014 are good for any organization that is dealing with global risk, be it a corporation, an academic institution, a non-profit organization, national government, or international organization.

CONCLUSION

This is my final post on the Global Risk Report 2014.   I have written posts about the 2012 and 2013 versions of this report, but this year I have spent three whole weeks on posts covering one end of the report to the other.   I did it for my education, because it is one of the most important documents to come out of the World Economic Forum each year.   I can only hope that some of the readers out there will be interested enough by reading these posts to look up the source document itself, which is at the following web address:

http://www.weforum.org/reports/global-risks-2014-report

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