Labor concerns are top-of-mind for executives globally heading into 2023. When asked to identify highest risk concerns next year, 64% of executives said the operational aspect of labor, such as the ability to attract and retain top talent, as their greatest concern, according to a recent survey, conducted by Protiviti and North Carolina State University. Macroeconomic concerns surrounding labor, like increases in labor costs that will impact profitability targets, tied for second (61%).
“Executives clearly foresee significant uncertainties as they peer into 2023," said Mark Beasley, professor and director of the enterprise risk management Initiative at the Poole College of Management at North Carolina State. "[Those uncertainties] may trigger a number of risk issues that may affect short-term performance.” Beasley co-authored the report, which asked more than 1,300 executives and board members about the issues that are top of mind. The survey gauged their thinking about macroeconomic conditions, the state of their business operations, and a corporate culture's role in risk management.
When asked to gauge concerns on a scale of "significant," "potentially significant," and "less significant," the survey found that executives have a very small number of issues they aren’t worried about. The highest number of "low" significance responses were given to the issue of (1) corporate culture's ability to identify risks and (2) organizational readiness for an unexpected crisis or catastrophic event.
According to Beasley, the survey reveals that the risk analysis of CFOs is much different than that of their executive counterparts.
“There are noticeable differences in perspectives about each of the 38 risks we examined when comparing CFOs' perspectives to board and CEO perspectives,” said Beasley.
“For 2023, CFOs did not rate any of the 38 risks at the ‘significant impact’ level, while boards and CEOs rated four and five of the 38 risks, respectively, at that level. It’s important to the organization that top management and the board reach some consensus view about which risks are most critical to the organization," he said.
Importance of Culture Now and Later
According to Beasley, a company's culture can be a risk analysis tool. Whether it’s over a year or a decade, the entrenchment of risk identification into culture is crucial to making accurate forecasts.
“A company culture that does not emphasize the importance of identifying, managing, and communicating about risks in the context of business strategy will find itself blindsided by unanticipated risks," said Beasley. "Those organizations whose cultures embed risk-thinking into the fabric of how they make key strategic decisions are more likely to be ahead of the curve relative to their competitors.”
More than half of executives (59%) surveyed have operational concerns surrounding corporate culture. They are highly concerned about resistance to changes in culture resulting in failures to make necessary adjustments to the business model. More than half (54%) also indicate their organization’s culture may not sufficiently encourage the timely identification and escalation of risk issues and market opportunities that have the potential to significantly affect core operations and the achievement of strategic objectives.
But effective leadership can change the culture around risk and opportunity identification. “Leadership from [executives] is about the importance of thinking about ‘risks before the risks’ emerge is key to establishing a risk perspective and then explicitly embedding risk considerations into strategic plans, budgets, and capital allocation decisions," Beasley said. That helps business leaders throughout the organization "to connect the importance of considering risks in the context of what they are trying to do strategically."
Wary of Disruption
A widespread risk identified for 2023 is the extremely fast pace of technological innovation, according to Beasley.
“We have observed a general theme about long-term risks tied to unexpected disruptive innovations emerging that may derail how organizations do business," he said. That concern is likely to be long-lasting, Beasley said. "Technology developments are emerging from all kinds of places and the speed at which new innovations emerge is only increasing."
“Likely this will be a risk that we’ll be discussing ten years from now," he continued. "It’s unlikely to go away given our ever-growing dependence on technology solutions.”
One of the most important things for CFOs to do to prepare for the long term is to engage other executives, management, and the board of directors in conversations with risk as the focal point. For an executive, especially a CFO, it can be detrimental to assume that risk interpretation and understanding are the same across the entire executive team and the board.
"Assuming everyone is on the same page about what risks are most important is a fatal flaw," said Beasley. "Our study reveals a significant difference in risk views across different executive positions. Ignoring that disconnect may mean the leadership team is focused on the wrong risks for its organization."
"Getting everyone on the same page will lead to efficiencies in how risks are addressed," he said. [That] will increase the likelihood that resources of the organization are being deployed towards the right risks.”