World leaders have been direct about global economic prospects.
They’ve left us in no doubt. Just refer to IMF’s incisive statement that the
global economy is in a synchronised slowdown, and the assessments
of slow economic growth by the World Bank and World Economic
Forum .
From a corporate perspective, many CEOs and CFOs are experienced in
dealing with economic slowdowns, given the Asian Financial Crisis of
1997 and Global Financial Crisis of 2007/08.
However, general responses such as cash conservation, reducing operational and capital expenditures and headcount freezes will need to be considered in a broader context.
You see, it’s not so much the challenges posed by a stagnating economy
that executives need to address to maintain profitability. In addition, they
need to deal with new risks that could upend their efforts.
According to the World Economic Forum, the top 10 risks in the next
10 years are non-economic risks, which consists of technological risks
(such as cyberattack), environmental risks (such as climate change), and
societal risks (such as infectious diseases).
Unfortunately, these risks have already manifested themselves in the form of corporate cyberattacks (for instance., Travelex, Norsk Hydro), the recent Australian bushfires and the pandemic of Coronavirus.
The occurrence of these types of risks will disrupt the economy. For instance, Moody’s assessment of the economic impact of Coronavirus is severe.
Why is it important to take account of the full spectrum of macro-risks
(economic and non-economic) in your decision-making? It is primarily
due to the interdependence of world economies – where trade and
capital flows can act as transmission channels for unplanned shocks –
which give rise to the contagion effect.
That is to say that a shock event can be transmitted from one market to another seemingly unrelated market, that may affect your company. (The contagion effect is an asset pricing phenomenon that has challenged even the best minds in business and policymaking. So here in this article I will only briefly touch on a few strategies to mitigate the aforementioned risks).
What can executives do to better address the threat of the expanding
range of macro-risks? The following options can be considered:
Strategy development
Get better at strategy development to take advantage of major trends
and risks. It is time to reassess major threats to your company, and
decide if they can be turned into opportunities and subsequently, how
the business can be repositioned.
Take the lead from Orsted, the most sustainable company in the world,
which transformed itself from a fossil-fuel energy company to a global
leader in offshore wind, in the past decade.
Redefine the marketplace such as the recycling specialist, TerraCycle, to
turn climate change into a profitable business.
Most importantly, expand the range of scenarios that are analysed as
part of the strategic planning process. Stress testing your company’s
ability to survive emergencies will improve its future sustainability.
Customer-focus
If you have customers that prefer to minimise their environmental
impact, then think about finding ways to meet their needs.
For instance, there are revolutionary developments in blockchain technology that allow consumers (via their smartphones) to track the journey of their fish meal to ensure it is a sustainable product.
Corporate governance
Improved governance will safeguard your company against contagion
effect. The Australian Prudential Regulation Authority is a prime example
with the recent strengthening of a prudential standard aimed at
mitigating contagion risk within banking groups in Australia.
Technology advancements
With the rapid adoption of Internet of Things and cloud computing, the
risk of cyberattack exponentially increases. Engage with technology
vendors that can manage device authentications and provide
military-grade security across various endpoints in your company’s
technology and telecommunications infrastructure.
Financial position
Take actions to strengthen the corporate balance sheet. Have a war chest
not only for investments in new markets, but to trade through tough
times from unexpected shocks.
In conclusion, there is a greater number of economic, environmental,
technological and societal risks in today’s world. Executives will need to
embrace strategic leadership to navigate through increasingly
unpredictable times.
It is a timely application of the words of Donald Rumsfeld, former US Secretary of State for Defence.
That is, strategic planning may need to be more comprehensive to reflect ‘known-knowns’ and ‘known-unknowns’. If the aforementioned world leaders’ assessments are anything to go by, then it appears the path to
profitability during a global economic slowdown is likely to be ‘clean
capitalism’, that is, climate-compatible strategies.
