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Risk Literacy: Need Of the Hour Whether it is turbulence or uncertainty; risk is inherently involved in every business scenario and hence, risk and risk literacy must become part of common business parlance

By Hersh Shah

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In the lexicon of business, we often hear of terms such as uncertainty, turbulence, rapid change, dynamism, disruption and complexity. While all these terms are relevant to business, there is one word that is often conspicuous by its absence—risk. A closer look will reveal that risk is in fact the common thread that ties together all the above situations. Whether it is turbulence or uncertainty; risk is inherently involved in every business scenario and hence, risk and risk literacy must become part of common business parlance.

Risk in businesses is defined as any future event or uncertainty that can throw a company off course and threaten its ability to meet organizational goals. Risks can be internal or external and can very often emanate from a multitude of directions. Companies today are in constant danger of being affected by cyber-attacks, natural disasters, public health crises, law suits, geopolitical instability and much more. Hence, risk literacy is the crucial first step towards securing a company's future.

What is risk literacy?

Professor Gerd Gigerenzer, a renowned German psychologist and risk expert calls risk literacy "the cement of society". He argues that risk literacy is must for every individual in every profession because at the end of the day, risk is inherent in everything we do. In the world of business, risk literacy is essentially defined as the ability to perceive risks that individuals or companies might face and the aptitude to make appropriate decisions after being aware of these risks. Risk literacy enables individuals to develop foresight and risk mitigation skills. A risk literate person is always in a better position to identify, strategize and deal with risk in an informed manner.

There are a multitude of risks that business owners face, below are a few of the most prominent kinds of risks that companies are challenged with.

Competitive risk

Risk from competitors is always real and can lead to a company not achieving its desired business goals. Competitive risk usually entails businesses becoming complacent about their success and the market status quo. In such a scenario, business leaders move away from continuous improvement and assessment, and instead just focus on their successes. In order to mitigate competitive risks, businesses must constantly innovate, refine and keep an eye out for their competitors.

Economic risk

Economic headwinds are common and companies must always be prepared to face adverse conditions. The economy is constantly changing and it doesn't take very long for companies to get caught in a firestorm. To offset economic risk, it is imperative for companies to focus on substantial savings and operate with lean budgets in order to weather trying times.

Reputational risk

Reputational risk has to do with a company's image in the market. All companies are at risk of negative perception at any given point of time. This can happen due to a variety of reasons—an unhappy customer, a product failure, a scandal involving the management, etc. To manage this kind of a risk, companies need to have reputation and crisis management strategies in place or else be prepared for massive sales losses and a dip in consumer trust.

Security and fraud risk

The future of the world is digital; more and more customers today are sharing their personal data via online mediums. And while the digital route is revolutionising our economy, it leaves us more vulnerable to cyber-attacks, hacking, identity theft, payment scams, and data breaches. The recent hacking at Twitter, wherein the accounts of prominent personalities like Barack Obama, Jeff Bezos and Elon Musk were hijacked, serves as the latest example of this risk. To effectively tackle this security and fraud risk, companies should divert maximum resources towards cyber security solutions and tools that help detect breaches and frauds.

Operational risk

Operational risks are usually external in nature and can happen suddenly. Risks arising from natural disasters like earthquakes or volcanic eruptions—such as the 2010 Eyjafjallajökull eruption in Iceland that caused massive air travel disruption—are all examples of operational risk. Operational risks can also be caused by human error—an employee can make a mistake that costs the company time and money. Addressing operational risk is crucial; therefore, businesses must have continuity plans and backup systems in place to ensure minimum effect on operations.

Compliance risk

Businesses have a plethora of laws and regulations to comply with. For example, a pharmaceutical company will have to comply with strict rules and regulations of the FDA, similarly, a mining company will have to follow EPA rules and flouting norms can have serious consequences for companies. Hence, staying abreast with updates in rules and regulations can help lessen compliance risks for companies.

How has the pandemic increased the need for risk literacy?

The COVID-19 pandemic had laid bare the business world's unpreparedness for a calamity of this magnitude. Not only has it pushed companies into survival mode but has also accelerated the demise of companies that were already in troubled waters. Take for example the case of oil and gas drillers like Whiting Petroleum and Diamond Offshore who filed for bankruptcy in late April, and J. Crew that became the first major U.S. retailer to do the same on May 4.

The pandemic has also exacerbated operational and cyber security risks for companies. For instance, chemical and production plants that were forced to shut down for a long period due to the lockdown now face the risk of more accidents due to sudden demand. This was the case for an LG Polymers factory near Visakhapatnam in southern India in May; the factory had a styrene gas leak that killed 12 people and left hundreds with serious injuries. The recent case of Russian hackers attempting to steal coronavirus vaccine research from universities and companies is another example of heightened cyber security risks during a pandemic.

The role of financial and risk literacy in a post-COVID world

Financial literacy is often looked at from a personal lens; it is understood to be an individual's capacity to comprehend money and investments for monetary gains. Nascent concepts of financial literacy first began to appear in public discourse in the 1700s and 1800s across the United States and England. For example, in 1737, Benjamin Franklin wrote a column titled "Hints for those that would be Rich' and in the 1800s in England, James Gilbart, a manager for London & County Bank, wrote an article about the importance of opening bank account. Financial literacy was formally inducted as a serious educational topic only in the 20th century, and today, it is intricately tied with risk literacy. Several studies have shown that basic financial literacy gained through experience in stock market trading and formal education helps make sound risk decisions.

The novel coronavirus pandemic has jolted financial markets all over the world and thrown off course the idea that financial literacy is somehow divorced from risk literacy – the two concepts are intertwined and going forward, individuals with both sets of knowledge will be highly valued.

Why do companies need risk professionals and who benefits most from a risk education?

Our world today is more advanced than ever, but it is also characterised by increasing instability. Hence, companies need risk professionals in order to be in the best possible position to deal with risk as and when it occurs. Risk professionals essentially fortify a company's defenses against the onslaught of a multitude of risk scenarios. Having a professional risk management team in place would help a company create a risk-adverse environment and adeptly handle risk as it occurs, and individuals with good analytical skills, an eye for detail coupled with problem-solving and decision-making capabilities, who have also acquired a thorough grounding in Enterprise Risk Management, will be highly sought after.

Hersh Shah

CEO, Institute of Risk Management - India Affiliate

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