Research Conducted by Protiviti and North Carolina State University’s ERM Initiative
Volatility in equity markets. Falling oil prices. Global terrorism. Escalating healthcare costs. Uncertainties in political regimes in certain parts of the world. Disruptive technological innovation. Expanding regulation and oversight. Shifts in expectations about China’s economy. Strong U.S. dollar. These and a host of other significant risk drivers are contributing to the risk dialogue in boardrooms and executive suites.
Entities in virtually every industry and country are reminded, all too frequently, that they operate in a risky world. Recent terrorism events, perceived adjustments in expectations about economic conditions in China, the rapidly increasing costs of healthcare, and continued concerns about cyberdata breaches vividly illustrate the realities that organisations of all types face risks that can suddenly propel them into global headlines, creating complex enterprisewide risk events that threaten reputation and brand. The rapid and steep decline in oil prices was not anticipated by many players in the energy industry, reminding everyone that they need to expect the unexpected. Boards of directors and executive management teams cannot afford to manage risks casually on a reactive basis, especially in light of the rapid pace of disruptive innovation and technological developments.
In their fourth annual survey, Protiviti and North Carolina State University’s ERM Initiative report on the top risks on the minds of global boards of directors and executives. Our respondent group, which includes 535 board members and C-suite executives from around the world, provided their perspectives about the potential impact over the next 12 months of 27 specific risks across these three dimensions:
- Macroeconomic risks likely to affect the organisation’s growth opportunities
- Strategic risks the organisation faces that may affect the validity of its strategy for the pursuit of growth opportunities
- Operational risks that might affect key operations of the organisation in executing its strategy
Manufacturing and Distribution Industry Group – Top Risks for 2016
Not surprisingly, economic conditions rank as the top risk issue for the Manufacturing and Distribution industry group. In fact, industry board members and C-suite executives rank this at its highest level of significance in the past three years of the survey. Global markets remain in turmoil, which has an especially strong impact on these organisations. With the threat of another recession on the horizon during our survey period, board members and executives are concerned.
Closely related to economic uncertainty is volatility in global financial markets. Many Manufacturing and Distribution companies either operate or sell their products – or both – on a global scale. These organisations already are experiencing the effects of financial-related events in China along with falling oil prices worldwide. The coming year appears equally murky, and as the higher risk level for this issue suggests, Manufacturing and Distribution companies have a sense of uneasiness about the markets and the impact they could have on the industry group.
Of note, economic conditions and global financial markets stand out clearly as the top two risks for Manufacturing and Distribution companies. Understandably, more of these organisations are taking initial steps to adopt enterprise risk management, starting with risk assessment projects. They are determining how they can most effectively manage through shakiness in the economy and financial markets.
Cyberthreats represent a new entrant to the list of top risks for Manufacturing and Distribution organisations, which unlike companies in other industries, had not viewed cybersecurity at the same high level of risk in previous years of this study. Manufacturing and Distribution companies do not house the type of customer data – for example, credit card information, social security numbers and other personally identifiable information – that organisations in Financial Services and Consumer Products do. However, the cyber risk environment has changed dramatically. The security of information and intellectual property is now part of virtually every board agenda. Furthermore, cyberthreats now encompass not only data theft, but also the potential takeover of critical systems and infrastructure, along with technology embedded into factories and operations. Without question, cyberthreats are now a critical risk issue for these companies.
Succession-related issues remain a top five risk, as well, though its level of significance dropped this year compared to the 2015 study. In the industry, there was relatively low turnover during the last recession. Last year’s spike in this concern likely reflected an improving economy and the risk that key talent would leave the organisation. These issues remain, particularly for professionals at the middle management level.
With regard to regulatory changes and scrutiny, there have been no extraordinary changes in the industry. However, Manufacturing and Distribution companies still have a significant compliance burden when it comes to various occupational, environmental, health and safety requirements, along with issues including, but not limited to, conflict minerals and the labour supply chain. Manufacturing and Distribution companies likely see regulations as a long-term issue that will
probably rank among their top risks every year.
For further results and a copy of the overall survey report, visit www.protiviti.com/TopRisks.