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 organizations 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 organization’s growth opportunities
- Strategic risks the organization faces that may affect the validity of its strategy for the pursuit of growth opportunities
- Operational risks that might affect key operations of the organization in executing its strategy
Financial Services Industry Group – Top Risks for 2016
While the overall regulatory environment and its perceived impact on Financial Services institutions remain top of mind in 2016, albeit at a declining level for the third consecutive year, other risks – perhaps less obvious – have crept into the 2016 top five risks facing Financial Services organizations. The impact of internal succession options, coupled with concerns over being able to attract and retain top talent, landed this new category in the top five. Survey respondents in the industry also expressed heightened concerns over economic conditions, in a way foreshadowing the extreme volatility experienced in global trading markets in the first quarter of this year.
From a technology perspective, respondents remain highly concerned over the impact of potential cyber events, as well as security and privacy risks in general, with these risk issues increasing in significance over the prior year results. There likely isn’t a board or executive committee meeting occurring these days where either the institution’s own vulnerabilities and performance against cyberthreats or the impact/lessons to be learned from other external market participants’ breaches aren’t being discussed. However, dropping from the top five risks facing Financial Services institutions are two risks that we would have expected to be higher – namely, risks from social media and mobile/Internet-based applications, and the risk of disruptive technologies and new innovations impacting the institution’s ability to compete. Given all of the discussion and press surrounding Fintech firms (which deliver financial services based on using software and are at the cutting edge of peer-to-peer financial products and services), the level of investment in such firms and the rapidly evolving payments space among other sectors, it is somewhat surprising that these risks have moved lower on the list. Perhaps this is a sign that Financial Services institutions feel they have a better handle on the overall threat these risks may pose or that the speed to impact is perceived to have slowed. Regardless, it will be important to continue to monitor developments in these spaces and we would not be surprised to see them reappear among the top risk issues for the industry group in future surveys.
Interestingly, despite the combination of new risks entering the highest level of respondents’ concerns, an ever-present concern over regulatory matters, and higher expectations over the magnitude and severity of risks that Financial Services organizations will face over the next 12 months, respondents quizzically indicated that they will be less likely than the prior year to devote additional time and/or resources to risk identification and management activities over the next 12 months. Perhaps this a reflection on past investments in upgrading risk management capabilities, which would be a “glass half full” scenario. Or, this may reflect either fatigue by executives and boards at the level and sustained pace of such investments and a desire to focus resources on other agendas, such as customer experience, revenue growth and innovation. This latter view is beginning to manifest in the marketplace, where C-suite executives and boards are challenging risk and compliance functions to perform their duties while increasing efficiency or, at the very least, slowing the pace of resource growth.
For further results and a copy of the overall survey report, visit www.protiviti.com/TopRisks.