Why there is need for enterprise-wide risk management in post-pandemic India

When we reflect on the enormity of these challenges that stare us in the face, the impact of the current pandemic pales into relative insignificance.

When we reflect on the enormity of these challenges that stare us in the face, the impact of the current pandemic pales into relative insignificance.

The government and regulatory authorities have the magic wand to solve all our problems. For India and India Inc. to succeed, public policy and legislation must facilitate this path to success. Macroeconomic transformation is the only way to microeconomic well-being. These are commonly held notions. However, that may no longer be the only route to address complex socio-economic challenges that India, Indian industry, and Indian citizens are facing. Let us analyse the scenario.

We are possibly living in the best of times in terms of corporate and macroeconomic success-

  • In the last year, India emerged as the fifth largest economy in the world (in nominal GDP terms), and the third largest economy in the world (in terms of GDP by purchasing power parity). 
  • The Sensex is at a historic high of 60,000. In 2020-21, India witnessed the highest ever equity inflow of Rs 2.74 lakh-crore, and a forex reserve of over $640 billion. 
  • Over the next quarter century, nearly 80% of the Indian population i.e., over 100 crore people will transition into the middle class as India becomes a $45 trillion economy (by purchasing power parity). Their per capita income will increase three times from the current levels of about $2,000. Among the comity of nations, the Indian economy will have the enviable combination of ambition, size, and capacity.

We are probably living in the worst of times in terms of socioeconomic inequities- 

  • Despite 30 years of economic liberalisation, the average daily household income of an agricultural household is about ₹336 (farm and non-farm earnings). India’s richest 1% holds over 40% of national wealth, and the bottom 60% of the population owns a mere 4.8% of the country’s wealth. 
  • In the last 15 years, over 1 crore Indians have died due to tuberculosis, malaria, and cancer. Yet, we haven’t been able to make substantial public health infrastructure investments to address diseases endemic to India. Except for the pandemic year, India’s total healthcare spending (out-of-pocket and public) is a meagre 3.6% of the GDP, the lowest among BRICS countries. The average for OECD countries was 8.8% of GDP, whereas it was 16.9% for developed economies like USA, and 11.2% for France and Germany. 
  • With 18% of global population, India has access to only 4% of global water resources. Consequently, nearly 50 crore people are affected by drought at some time in the year; and 16 crores lack access to clean drinking water. 
  • According to the 2018 WHO Report, 14 of the world’s 20 most polluted cities are in India. Nearly 17 lakh deaths in India in 2019 were attributable to air pollution, the largest pollution-related death toll in any country in the world. Of the 6.2 crore tonnes of annual waste generated in urban India, only 20% is processed. Environmental degradation costs the country over US$80 billion every year. Nearly 4 crore Indians are affected by water-borne diseases every single year. We lose over 15 lakh children to diarrhoea alone. 

When we reflect on the enormity of these challenges that stare us in the face, the impact of the current pandemic pales into relative insignificance. This is the landmine of risks that each of us as individuals and institutions, corporations and governments, will have to traverse before we can bask in the glory of being acknowledged among the top three global economies. A close look would reveal that these risks are not limited to issues connected with finance or operations, or to specific strata of society. They permeate every aspect of life of an ordinary Indian – economic inequity, malnutrition, public health, drinking water, environmental degradation, climate change, and more. The list is long and incredulous. Therefore, the time has come for corporations, the largest non-government stakeholder in the ecosystem with the greatest access to resources and top-quality talent, to look at management of risks beyond the obvious lens of a rules-based compliance system. No longer is ticking the regulatory box going to be enough to ensure sustainable and inclusive success. The one-size-fits-all approach of regulatory authorities and professional associations to standardize the risk function may not suffice.

Transitioning from Compliance to a Culture of Risk Management

Why do I say so? Why must companies do something that regulation doesn’t require them to do at present? It is pertinent here to underscore the fact that regulations are mostly framed based on past experience or emerging issues. They may not always be able to predict and regulate at the speed with which socioeconomic and geopolitical changes are unfolding. The recent pandemic has also awakened us to this harsh reality. Moreover, the frequency with which almost every regulation is being contested outside the Parliament, further delays the legal mainstreaming of many vital processes. As India emerges among the top 5 leading nations of the world, the stakes for the country and the economy are much higher than they were when we were in the top 10. Hence, in self-interest, there is a need for agility in anticipating and addressing risks at the company level not currently identified in routine compliance mandates. Not doing so may spare the company legal ramifications but will expose it to risks that may threaten its very existence. An April 2020 study by the Institute of Risk Management found that 32% of the 950 global organisations surveyed had not considered pandemic risk or anything similar before it happened. Nearly 20% of organisations who considered pandemic risk didn’t then do anything about it. However, 94% believed the case for risk management was strengthened by the pandemic experience. In either case, it wasn’t mandated by regulation or compliance systems.

The global pandemic is one of the defining developments of this century that makes a compelling case for companies to transition from a compliance-based approach to risk that is siloed and primarily focused on preventable and internal risks, to a holistic approach of Enterprise Risk Management (ERM) that helps in managing strategic risks and anticipating external risks. ERM focuses on the relationship of risk management with governance, social responsibility, sustainability, and organisational prosperity, all of which are interrelated and integrally essential for sustained corporate success.

With the need for such an urgent mindset change, which the corporate world hasn’t been prepared for, the solutions are not going to be only top-down. They will also have to be bottom-up. They will not only emerge from deliberations in the boardrooms, but also from discussions in the classrooms. The solutions will emerge through a convergence of this common purpose between academia and industry to address risks in societal and economic spheres.

Creating Holistic Enterprise Risk Professionals 

A beginning of this urgent requirement for risk-aware leaders, managers, policy makers, and citizens, will have to be made in the classrooms of Indian higher education institutions. Towards this end, the awareness about a contextual approach to risk management is vital. For long decades, leaders and mangers have been looking at the risk vs reward paradigm. The 21st century no longer permits this luxury. We will have to look at a more holistic risk vs responsibility paradigm. Young students will have to be groomed with the capabilities to perceive the nuanced situations that will emerge in the decades ahead, and substantially reduce, if not totally avoid, the negative impact of business and its decisions on people, society, and the environment. They will have to be trained to look at things in more structured and proactive ways, rather than ad-hoc and reactive ways. The former is risk management, the latter is crisis management. 

This paradigm change requires integrative skills that are crucial in decision making. In the current scenario, most of the learning in universities happens in silos. Students are exposed to specific subjects in the classroom. But real-world decisions are not taken that way. A multi-disciplinary approach is a must. In the coming decades, the key skill for professionals desirous of rising to the top echelons of power, would be the ability to see the big picture, connect the dots, and reduce negative impact of risks not only on the profitability of the organisation, but on a large set of its stakeholders including customers, employees, supply chain partners, local community, and the environment. 

In the future, a corporation’s ability to effectively manage its risks will depend on how seriously its executives across management hierarchy take its enterprise-wide risk management function when the sun is shining and there are no clouds on the horizon. Unfortunately, the sky is already overcast. But there is hope. And for that, a beginning will have to be made in nurturing such forward-looking leaders in the classrooms of Indian higher education institutions.

(Shashank Shah is the Board Research Chair at Institute of Risk Management, India. Views expressed are the author’s own.)

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