Managing risks in VUCA environment
Identify risks to understand your business' potential
Nowadays, we often hear about the managerial acronym VUCA representing volatility, uncertainty, complexity, and ambiguity that conflates the reality of the business environment and the challenges of risk management. We all know that companies are in the business of taking risks for rewards. Situated between the companies and the rewards are the risks.
The manifestation of VUCA can be seen in many forms - a massive collapse in commodity prices, cyber security threats, natural disasters, technological glitches, and more recently, Covid-19.
CHARACTERISTICS OF A SUCCESSFUL COMPANY IN THE MIDST: While risk management principles will continue to be relevant, companies need to proactively adopt a VUCA lens when implementing risk management, including each phase of the risk management process.
In the corporate governance arena, the principle of establishing of a sound system of risk management is a generally accepted global norm in the Code of Corporate Governance. However, setting up a system of risk management is not a panacea. The framework and process must be continuously strengthened to be fit for purpose.
RESPONSIBILITIES OF THE BOARD: As responsible stewards, the board and management have to exercise due diligence to ensure that the company is resilient to the adverse impact of VUCA. In recent years, there has been a growing awareness and adoption of risk appetite statements by companies in their financial statements. Such a statement serves to align the boundaries for risk taking, in addition to issuing advisory for opportunity for the companies.
RISK HINDSIGHT, INSIGHT AND FORESIGHT: Looking at the past and current risk landscape may provide hindsight and insight into the potential risks ahead. It is like driving a car and using the rear-view mirror while simultaneously looking ahead at what is beyond the windscreen. Management requires a risk-sensing mechanism that moves with the pace of the dynamic VUCA landscape.
RESPONDING TO VUCA RISKS: In relation to the externalities and disruptive nature of VUCA, these risk responses call for greater contingency planning and collaboration with external stakeholders. While you can anticipate and manage internal risks through your experience, but when it comes to external VUCA risks, in most cases, companies would have to adopt a "trial-and-error" approach when faced with these risks.
STAYING CONNECTED, WATCHING RISKS: By its very nature, risks that arise in a VUCA environment are not static. Risk levels do change - they may decline or escalate. To summarise, risk monitoring is about watching what matters. This requires selecting the pertinent risk triggers and establishing the appropriate escalation protocol.
EMPOWERING EACH OTHER: The way risk is embraced by personnel within the organisation and whether each one "walks the talk" serve as the foundation for sound risk management. To meet the challenges, the board and management necessarily have to depend on those at the frontline. In tandem, the frontline needs the board and management to provide clear direction, resources, and incentives against the threats.
Managing the risks, the acronym can become Vision, Understanding, Clarity and Agility (VUCA).
Anish Mehta is Chairman, ICAI DUBAI CHAPTER
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