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PWC - Resilience: Winning with Risk - What it is and why its needed - March 2013

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    PWC - Resilience: Winning with Risk - What it is and why its needed - March 2013 PWC - Resilience: Winning with Risk - What it is and why its needed - March 2013 Document Transcript

    • www.pwc.com/resilience Resilience Winning with risk A journal of strategy and risk 02 05 08 12 15Special focus on Keeping the Resilience: Harnessing financial A new framework Business-not-Global Risks lights on What it is and innovation to for disaster as-usualIssue 3 Interview with why it’s needed strengthen disaster reduction Richard Gledhill Steve Holliday Lee Howell resilience Carlos Castillo Dan Hamza-Goodacre Erwann Michel- Lauren Cook Lit Ping Low Kerjan Oz Ozturk 21 26 31 37 41 Private equity: Bouncing back: Egypt: Resilience in the WEF Global Risks, Value in Two Japanese Weathering eye of the storm one year on responsible corporations’ road the storm Neil Kaufman World Economic investment to resilience Rehab Abdelhafez Forum, in Shami Nissan David Jansen collaboration Malcolm Preston William Macmillan with PwC
    • ContentsLetter from the publisher Dennis Chesley 01CEO perspectives on resilience Steve Holliday, National Grid Group (UK) 02Systemic Resilience Resilient CountriesResilience: What it is and why it’s needed Lee Howell 05Resilient MarketsHarnessing financial innovation to strengthen disaster resilience Erwann Michel-Kerjan 08A new framework for disaster reduction Carlos Castillo, Lauren Cook and Oz Ozturk 12CEO perspectives on resilience Shikha Sharma, Axis Bank Ltd (India) 14The Long-Term View Climate ChangeBusiness-not-as-usual:Tackling the impact of climate change on supply chain risk Richard Gledhill, Dan Hamza-Goodacre and Lit Ping Low 15Sustainability in PECreating value through responsible investment:Are the hard and lean going soft? Shami Nissan and Malcolm Preston 21CEO perspectives on resilience Seymur Tari, Turkven (Turkey) 25Markets in Peril JapanBouncing back: Two Japanese corporations’ road to resilience David Jansen and William Macmillan 26EgyptEgypt: Weathering the storm Rehab Abdelhafez 31United StatesPicking up after Sandy: Resilience in the eye of the storm Neil Kaufman 37CEO perspectives on resilience John Koustas, Danaos Corporation (Greece) 39Resilience practices: One-year follow-up analysis on Global Risks 2012 cases Overview 41Case No. 1: The Seeds of Dystopia 42Resilience in action: Tracking trends to challenge assumptions and steer the right course 45Case No. 2: How Safe Are Our Safeguards? 46Resilience in action: Taking advantage of windows of opportunity 49Case No. 3: The Dark Side of Connectivity 50Resilience in action: New behaviours for a new world 52
    • Letter from the publisherBy Dennis ChesleyIn this third edition of Resilience: Winning with risk, we collectperspectives from practitioners on the ground confronting political,social and environmental change – from experts pursuing marketsolutions to systemic challenges – and from CEOs, formulatinggrowth strategies against a landscape of challenging global risks.As a new year dawns with a mix of optimism and scepticism, wehope these perspectives help you think wisely and act skillfullyabout your organisation and its operating environment.We hope you get value from this edition and look forward to your Dennis Chesleycomments and suggestions. Risk Consulting, Global LeaderWe see three emerging themes of note: The second dimension of time concerns Do actions taken by countries toThe first concerns time frames, the short- versus long-term perspectives, become more risk-resilient alwayssecond concerns levels of analysis, and and all those in-between. Crises clearly enable companies to become morethe third concerns tools and frameworks require highly focused short-term so, or are there circumstances infor helping organisations become thinking to respond to them. which they have the opposite effect?more risk-resilient. But having the capability to adapt to Is an organisation of risk-resilient long-term trends is equally important. individuals, a risk-resilientThere are two dimensions of time organisation or not? More generally, Companies in Japan have been forcedframes that are important. The first under what conditions could actions to do both. Companies in Egypt areconcerns the relative usefulness of taken at one level to become more confronting a relatively inhospitable resilient render higher and lowerlessons from the past in dealing with current environment, but which manyfuture challenges. It would be naïve to levels less effective? Relatedly, when believe has positive long-term prospects. do external trends multiply and whenthink that there is nothing that can be Changing business models can also do they dampen inherent risks?learned from history, but it would be change the time frames in whichequally foolish to think that even a companies operate, as is the case with The third theme concerns the newcomplete understanding of history will the private equity industry today tools and processes that are emergingbe enough to know how to confront where the longer holding period of to help organisations become morefuture challenges. Every organisation portfolio companies is making greater risk-resilient. These include financialmust start by learning from its own attention to environmental, social and instruments such as catastrophe bonds,past experience in terms of what it along with data-driven research governance issues more necessary anddid and didn’t do well – the response to efforts to identify the characteristics more attractive. Do the steps requiredHurricane Sandy is a clear case in point of a risk-resilient organisation and to be a risk resilient organisation in the practical processes such as stakeholder– so that it can better prepare itself for short-term and the long-term reinforcethe future. Too many organisations fail engagement. This begs the question each other, or do choices need to be of where these new tools and processesto reflect on their experience. What are made about their relative emphasis? will come from. How can we identifythe ways in which your own organisation areas where these are most neededdoes so and how does it codify these The second theme centres on the and who is in the best positionlessons? But this codification must importance of recognising the systems’ to develop them - subject matterbe augmented by looking at how peer nature of the world we live in, which is experts or companies themselves?organisations are becoming risk- comprised of different units of analysis. How can social media be leveraged soresilient and what emerging ideas Risk-resilience is a concept that equally as to facilitate better problem-solvingare coming from the academic and applies to governments, which are part and not to deter or distract fromprofessional community, such as of the larger system in which a company real progress?alternative risk transfer instruments. is embedded. The company, in turn, isHow does an organisation ensure that the larger system in which groups andit has learned from its past without units are embedded, which themselvesbeing trapped by it? are the context for individuals.  Dennis Chesley Resilience: Winning with risk I  1 
    • Keeping the lights onIn this special interview conducted for PwC’s Global CEO Survey,Steve Holliday discusses the challenges faced by a global electricutility company, in an era where pressures to move away from coalto other sources of energy are growing. He notes that few countrieshave the luxury afforded by the US of heavily shifting towardsnatural gas, and must seek to find the right balance betweencoal, natural gas, nuclear and alternative renewable resources.Such strategic questions are made more challenging in an era whereconsumers, through social media, expect to have more voice in thedecisions local utilities make. Steve Holliday Chief Executive OfficerToday’s large utility companies - many grown through acquisitions and National Grid Group Plc. UKmergers - bring the benefits of scale, but these need to be balanced witha local focus. Scale and the long-term time frames utility companiesmust operate in also make it difficult for these firms to become moreadaptable, something that more local focus and changing energyscenarios demand.Q. In the light of the Fukushima Q. How adaptable would your Of course, a number of these crisis in Japan last year, do you organisation be if a shock hit you scenarios get close to Armageddon, see major demand and supply in the centre of your activity? but none of them would cover shocks coming in the environment And at the board level, do you something like Fukushima, for you’re operating in? plan for such shocks? example, where you decide to shut down all of the nuclear plants. Steve Holliday (SH): We are in a SH: We have a very particular role You can’t handle that in the UK. world where we need politicians to in the UK because we sit at the heart That would not ensure reliable be quite brave and take decisions of the electricity and gas market. supplies. You couldn’t handle it in that are far-reaching. A threat to So we model an enormous number Japan, where, of course, they have our business can come about when of scenarios to try to think about had a very difficult power problem we’re investing in infrastructure potential shocks. What would for quite a period of time. Because that requires support over a long happen if gas supplies from Europe of Fukushima, Germany has taken period of time and there is a sudden shut off? Up to 40% of our gas a decision to shut its nuclear fleet switch or U-turn in energy policy. potentially comes in liquefied down but that can’t be done You can find yourselves having made natural gas (LNG) from the Middle overnight. It will have to be done investments that are not in the East these days, so what would over a period of years and replaced long-term interest of consumers all happen if something went wrong with other sorts of generation. of a sudden, or having to make a there? How do we make sure we’ve So you think about those scenarios, whole bunch of other investments got robust scenarios? And, in fact, across different timescales. How do very quickly to ensure you’ve got we can present that to the government we be sure that we’ve got reliable reliable supplies of energy. You can and gain some assurance there. energy supplies we can afford for see that with the changes in Japan. On the generation side, we have to the next one year, three years and You can see that with some of the run a system that is robust enough what are the different mixes that changes in Europe in the last year. to cope with major power stations are five plus years out and how do So it is very important to our business shutting down. we make sure our investments are that there is consistency of policy and sticking with things and making robust against a range of scenarios? sure that, as governments develop That’s exactly the way we think those policies and the regulations, about our business. they’re well-thought through and based on real evidence.2 I  Resilience: Winning with risk 
    • Q. What’s your view on natural gas As we think about the mix in the Q. How would you assess your as a game-changer 50 years ago, UK, there are lots of renewables, organisation’s ability to adapt to and what do you see on the which are quite clearly a part of our change and disruptive events horizon in the power generation future. We are rebuilding a nuclear generally, compared to the past? business that might change the fleet over a long 20-year timeframe, game again quite radically? and hopefully finding a way that we SH: It’s been a huge challenge to get can capture the carbon from coal an industry that by definition is SH: Natural gas certainly was a and still consume coal – but that’s, thinking 20, 30 years ahead, is game-changer 50 years ago: we had in my view, still at least a decade away. associated with slow thinking and in the UK, of course, a dash for gas. Natural gas is going to continue to which has historically liked to have In the US right now it’s a game- play an important role as a fuel for a plan, to change into an industry changer again. Shale gas and cheap power in the UK, but the sources of that thinks much more flexibly, gas prices have completely changed natural gas have changed enormously. much more about scenarios and the nature of the heating fuel By 2020 more than 70% of the gas how to adapt to warning signs of business in the US, particularly in in the UK is going to be imported. change in those scenarios. Building the cold parts in the north. In our That’s in complete contrast to the flexibility into thinking processes own business, two years ago we US, which a few years ago was has been a real journey the last were advertising to convince people importing and now sees an three or four years. Part of that as that they should replace their old well is just about organisational opportunity to export gas. boiler that was both inefficient flexibility. How do you streamline and very dirty. In fact, we used to There’s an enormous amount of the organisation with its layers? campaign and say take three four- noise and excitement, of course, in That has been a lot of what we’ve by-fours off the road by shifting other parts of the world about the been doing in both the UK and the from oil to gas – which is the possibilities of having shale gas, US. So there is just a speed of equivalent in terms of carbon and being another US. Does it thought process, a speed of removal. We don’t need to advertise change the whole economy through decision-making that is different today: the price speaks for itself. availability of cheap fuel? I don’t today than it was in the past. think anywhere else is going to Are we where we need to be yet? We can’t keep up with the number No, still not, and people who work replicate the degree of gas that’s of people who want to change to with us or who are stakeholders been available at such cheap prices natural gas. And it is a game-changer would not yet describe us as agile. in the US. If I’m wrong, I’d be delighted. also in terms of generation. The US Yet the shape of the industry, the It will certainly be great for the UK looks a little bit like the UK in terms challenges we’ve got in terms of this but I don’t think we’ve got anything of many of the old generators, both unpredictability, the need for us to like those levels of reserves or the coal and nuclear, that are going think about different scenarios, but ability to exploit them. to be retired in the next ten years. also understand new technologies Today, they’re most likely to be While we don’t yet have enough that are coming in and how we replaced by natural gas fuel plants, information to understand the can quickly adopt them for our much as here. recoverable gas levels in the UK customers, all mean we’ve got to be anyway, clearly we have a very agile to a degree we’ve never been different situation trying to recover before. That means changes in the gas from a densely populated way people work, particularly country and navigate the laws of changes in structure about how who owns the subsurface and the you matrix the organisation more, permissions that you need to drill. how you share information more through new media, both across the Somebody who owns the land in the UK organisation and between the US has a huge incentive to want to UK and the US. We’re on a journey drill. It’s not the case in the UK and here, but we’ve got a long way to go. the complexity of this island means it’s just unlikely we’re going to be able to replicate what has happened in the US. Resilience: Winning with risk I  3 
    • Q. How much is the influence of The big challenge, of course, is benefits of international scale and and the level of engagement social media and how we can use yet going back almost 40 years with stakeholders growing that to help explain some of the to considering how to connect in in your business? things that we’re doing in our locally to your communities, is business and, moreover, how can difficult for an industry like ours. SH: The regulator and government we keep this continuous conversation We don’t have the luxury of picking have always been major stakeholders going on about the challenge of up a manufacturing plant and moving but today there is also a very energy and what you’re paying for. it down the road or moving it to different new set of stakeholders, It’s important to remind people just another continent: the assets are in right down to you and I. The public how important it is that we’ve got the communities. It’s not surprising at large are stakeholders because energy at our fingertips. We just therefore that there is a huge focus they can take part in discussions on don’t understand the value that on reinventing things that used to social media. They can influence we have in the UK and the US exist when people spent more time our decisions and we actually want in flicking a switch and having in their communities, were more them to do that. So one of the something work all the time; it’s known in their communities: that changes that’s been going on inside something that we’re going to have is part of our licence to operate. National Grid for the last two years to pay more for in the future and we in particular, encouraged very need to focus on helping customers I also think it is part of the type of much by the regulator in the UK, reduce their energy consumption. company we are, always have been, is to really consult with society, So all of that is part of this big but want to remain in the future. customers and local neighbours debate and interface with customers, If you want to come and work for about what they want from their lobby groups and NGOs, and it is National Grid, earn a good wage, energy systems. escalating year-on-year. I do think have a really exciting career and be we’re getting better at it, but I also involved in some ground-breaking Part of our challenge has been to energy transformation in the recognise that it’s a skill set we’re make sure that we are genuinely countries in which we work, you going to have to continue to hone. consulting. It’s a word that often also need to be a person who is gets misinterpreted by businesses Q. How have you increased your happy to go into the community and into an ‘I’m going to show you what impact on your new stakeholders volunteer and be engaged. It is part I plan to do and I’m sure you’re and their communities? What of the psyche of the organisation, going to be happy with it, aren’t benefits has that impact had but I think it’s just going to be you?’ exercise. We try to build a for your organisation? increasingly a necessity for us to be process that genuinely goes out and able to feel with all of our customers listens. We try to get a conversation SH: One of the challenges I’ve been that we’re part of their community. going and ask some questions about focused on for the last few years is That will enable them to understand what people would like from their how we bring the benefits of scale some of the things that we are going energy systems and what they value to customers and yet are really to need to do to ensure they’ve got most. Their answers influence our seen as being local. National Grid power and heat, and they will be able plans. That’s exactly the way we’ve is made up of many companies to put a human face on it. So, in built our big plans in the UK and that have come together through some ways, it sounds a bit like we’re the most interesting part of that acquisition to be the organisation inventing the past. We are to a journey has been that as we’ve it is today, with the skills and the degree, but in a different way. listened, surprise, surprise, we’ve finance to do the things we need to actually learnt something. So we’ve do for society in the future. What not ended up actually getting to that led to, though, was a real view the answer we thought of when we from many customers about the loss started. The consulting process has of their local company at a time actually changed the answer and when everyone wants to get much that’s helped us obviously start to more involved in decision-making change the culture even more about on a local basis. So achieving this genuinely listening. balance, between bringing the4 I  Resilience: Winning with risk 
    • Resilience: What it is andwhy it’s needed By Lee HowellRisk resilience is as important for countries as it is for companies. Lee Howell is Managing Director, Member of the Board at the World Economic Forum. He hasFrom a systems-thinking perspective, a risk-resilient country is one editorial and operational oversight of the Forum’sthat can adapt to changing contexts, withstand sudden shocks three flagship events: the Annual Meeting inand recover to a desired equilibrium, and all while preserving the Davos, Switzerland; the Annual Meeting of New Champions in China; and the Summit on thecontinuity of its operations. The ability to recover from a crisis and to Global Agenda in the UAE. Howell is also Editor-adapt to a changing environment are both important. Preliminary in-Chief of the Global Risks Report and responsibleresearch suggests that resilience is linked to leadership ability, at the Managing Board for the following Forumtransparency and efficiency in getting things done, and good communities: Network of Global Agenda Councils, Global University Leaders Forum andrelationships between the public and private sectors. The World Risk Response Network. His prior responsibilitiesEconomic Forum’s Risk Response Network is developing a diagnostic at the Forum include serving as Director,tool to measure a country’s resilience in the face of global risks in terms Annual Meeting Programme, New York and Senior Director for Asia.of the five subsystems of redundancy, robustness, resourcefulness,response and recovery. This tool will be based on a combination ofquantitative statistical data and perception-based data.From natural disasters to financial a bridge or a skyscraper, but not this definition encompass bothshocks, global risks are exogenous necessarily for a country. History has recoverability (the capacity for speedyevents, which go beyond the capacity very few examples, if any, of a country recovery after a crisis) and adaptabilityof a country or corporation to manage that withstood a major stress only to (timely adaptation in response toon their own. Traditionally, the return to its previous state. a changing environment).practice of risk management has In a national context, stress often reveals National resilience requires ‘systemsfocused almost entirely on preventable a variety of critical but lesser-known thinking’ – that is, conceptualising arisks, where a culture of strict systems through which a country country as a system itself, which is bothcompliance can mitigate, or even part of larger systems and comprised manages to adapt by finding differentavoid, worst-case outcomes. Filling of smaller systems. Those larger ways to carry out essential functions.the analytical gap on global risks, systems include the global economy, This realisation is behind the effortthe World Economic Forum publishes the climate, communications networks by the World Economic Forum’s Riskannually its Global Risks report to Response Network (RRN) to develop that reach across borders, and soassess the likelihood, impact and inter- a diagnostic tool to assess a country’s forth; in effect, the Global Risks reportlinkage of 50 such risks. Its central resilience to possible global risks. analyses risks that play out withinprescription is that countries as well these larger systems. The proposedas companies need to focus much National resilience, in the context of diagnostic framework for assessingmore on building their resilience. this initiative, involves the capability to: national resilience to global risks 1) adapt to changing contexts; considers five subsystems that makeWhat does it mean for a country to up a country system – its economy, 2) withstand sudden shocks; andshow resilience in the face of risks it environment, society, governance 3) recover to a desired equilibrium,cannot manage alone? A structural and infrastructure – and works from while preserving the continuity ofengineer would define resilience as the its operations. a definition of resilience often usedcapacity to withstand more stress, and in a systems context: the ability toto return to normal after a stressful As global risks can be either sudden or maintain core functions in the wakeevent. This is a suitable definition for slow-burning, the three elements in of a major disturbance. Resilience: Winning with risk I  5 
    • Figure 1 What is resilience? Macro System Country Subsystems Economic Environmental Governance Infrastructure Social Robustness Robustness Robustness Robustness Robustness Components of Resilience Resilience Characteristics Redundancy Redundancy Redundancy Redundancy Redundancy Resourcefulness Resourcefulness Resourcefulness Resourcefulness Resourcefulness Resilience China economic Response Response Response Response Response Performance hard landing Recovery Recovery Recovery Recovery Recovery Source: World Economic ForumThe proposed framework of the RRN These five attributes of resilience will Ten countries received enough responsessets out to assess each of the five be applied to the five country sub- in the 2013 Survey to be statisticallysubsystems against five attributes systems mentioned above. The aim is significant, with Switzerland scoringof resilience drawn from the afore- to combine quantitative statistical data highly on both counts and Italy andmentioned systems thinking: with perceptions-based data in a India at the lower end of the scale. methodology similar to the Forum’s Interestingly, Japan was perceived toRedundancy – Having excess capacity well-established Global Competitive- be highly resilient environmentally,and diverse ways to accomplish the ness Index. In practice, this is done but significantly less so economically.same objectives by collecting perception-based data through two of the major Forum Meanwhile, respondents to theRobustness – Having fail-safes and Executive Opinion Survey were asked surveys administered annually:firewalls and the ability for decision- “How would you assess your national the Global Risks Perception Surveymaking to become either more government’s overall risk management with over 1,000 respondents, whichhierarchical or more modular effectiveness of monitoring, preparing feeds into the Global Risks Report; andwhen necessary for, responding to and mitigating against the Executive Opinion Survey, with over 14,000 respondents, which is major global risks (e.g. financial crisis,Resourcefulness – Having networks of a major component of the Global natural disasters, climate change,trust that enable flexible self- Competitiveness Report. pandemics, etc.)? (1 = Not effectiveorganising to adapt to crises in in managing major global risks;novel ways Respondents to this year’s Global Risks 7 = Effective in managing major globalResponse – Having good feedback Perception Survey were asked, for risks)”. This is a first step towards rankingmechanisms that enable the early each of the 50 global risks: “If this countries on the response capacity ofrecognition of emerging issues and risk materialised in your country of their governance subsystem.the ability to mobilise quickly expertise, what is the ability of the country to adapt and/or recover from Of the ten countries that attainedRecovery – Having the capacity to the impact?” The responses from statistical significance in the Globalrebound from a crisis by absorbing new environmental and economic categories Risks Perception Survey, the responsesinformation and adapting quickly of risks provide expert perceptions to the Executive Opinion Surveyto new circumstances of a particular country’s capacity for showed that governments in Germany, recovery in each of these subsystems. Switzerland and the UK were perceived by business leaders to have comparatively high-risk management effectiveness,6 I  Resilience: Winning with risk 
    • with Russia and Japan scoring It is possible to identify three broadcomparatively poorly. In general, themes from these seven items.countries perceived as having high-risk First, resilience appears to be linkedmanagement effectiveness tend also to to leadership ability – politicians mustscore highly on overall competitiveness be able to command the attentionas ranked by responses to the other of their people and get things done,questions in the Executive Opinion particularly in a moment of crisis.Survey, which are used to compile Second, resilience is aided by transparencythe Global Competitiveness Index. and efficiency in getting such things done. And third, resilience dependsThe RRN team performed statistical on good relationships between publicanalysis of survey answers to examine and private sector stakeholders,how responses to the question on risk allowing corporations to keep policymanagement effectiveness correlated -makers informed about changingwith others. These perceptions of conditions and how they can helpresilience were found to be statistically business to continue.significantly correlated to seven otherfactors covered in the survey: These are only preliminary findings, however, and much further work• Politicians’ ability to govern remains to be done as the RRN refines• Business-government relations the understanding of both resilience at• Reform implementation efficiency a country level and its measurement.• Public trust of politicians By combining assessments of each of the five factors of resilience as they• Wastefulness of government apply to each of the five country spending subsystems, the aim is to help national• Measures to combat corruption decision-makers to benchmark their and bribery country’s level of resilience, track• Government provision of progress and identify areas that may services for improved business require strategic investment in the performance face of looming global risks.Implications for key stakeholder groupsWhile lessons for stakeholder groups will become clearer as the proposeddiagnostic framework is refined and developed, some initial considerationsabout how different groups might contribute to national resilience can beidentified from research conducted so far:Governments – Public trust and the capacity for effective and efficientaction are essential in times of crisis. But they cannot be built in timesof crisis – the groundwork must be done in advance.Private sector – Businesses often have more presence locally thangovernments during crisis situations. Relationships of trust built throughpublic–private platforms can work to benefit all.NGOs – National resilience appears to be correlated with tackling corruptionand wastefulness and improving transparency. These are areas where civilsociety organisations can play a watchdog role. Resilience: Winning with risk I  7 
    • Harnessing financial innovation to strengthen disaster resilience By Erwann Michel-KerjanAs extreme loss events become almost commonplace, societies’ ability Erwann Michel-Kerjan teaches Value Creation at the Wharton Business School, University ofto cover the costs is coming under severe strain. Insurers may no Pennsylvania. He is the managing director of thelonger be able to offer affordable cover for all and governments Wharton Risk Management and Decision Processesmay not have the funds to systematically fill the breach anymore. Center, which – for nearly three decades – has been at the forefront of managing and financingWorking closely with governments and insurers, the capital markets’ extreme events. He is also chairman of the OECDability to develop innovative and effective alternative risk transfer Secretary-General Board on Financial Management(ART) mechanisms is therefore going to be crucial in creating an of Catastrophes, collaborating with its 34 member countries on these issues. Honoured as a Youngeconomically sustainable way to protect the fast growing number Global Leader by the World Economic Forum,of exposed businesses and communities. he advises several multinationals, foundations and heads of state.Conventional wisdom once held that to climate instability mean that financial solutions. A strong demandmajor crises and catastrophes are companies and governments will for such services and products haslow-probability events. Corporate have to learn how to better manage already emerged and is likely toboards and government leaders now the risk of expected but unpredictable significantly increase in the nextrecognise that this view is outdated. disastrous events. This includes five years. developing more effective ways toCatastrophes have unfolded at an proactively assess and manage extreme But the crux of the matter remainsunprecedented rate in the past few events before they occur, and also – who pays when the cost of restitutionyears, be they financial crises, large- create the foundations for a more continues to escalate. Given the spacescale natural disasters, intercontinental resilient society, if and when they do. restrictions of such an article, I willpandemics or major terrorist attacks. focus this examination of the potentialWe also live in an environment marked While risk managers certainly have solutions opened up by recent inno-by mounting food and water scarcity, an increasing role today, this new risk vations on one type of risk — naturalhigh climate variability, nuclear pro- environment is too important to be left disasters, and one aspect of riskliferation and cyber risks. Twenty of to risk managers alone. As a strategic management — financial hedging.the 30 most costly insured catastrophes matter, it must actively involve theworldwide from 1970 to 2011 have board of directors and a nation’soccurred since 2001.1 With the top leadership.exception of the 9/11 terrorist attacks,they were all natural disasters. This also presents opportunities all along the risk management cycle, fromLooking ahead, the frequency of high risk identification and assessment toimpact events could increase still risk reduction and financial hedging.further. A combination of a growing Turning risk management into valueand rapidly urbanising population, creation in this new era of catastrophesparticularly in coastal cities, and the demands new services, new typesincreasing frequency of disasters due of protection, and innovative new1 Erwann Michel-Kerjan and Howard Kunreuther. Paying for Future Catastrophes. New York Times Sunday Review, November 24, 2012.8 I  Resilience: Winning with risk 
    • Why is insurability Furthermore, climate science teaches In some cases, the governmentunder strain? us that a warming planet is more likely covers the resulting risks, by heavily to see more extreme climate events subsidising insurance premiums.While extreme events are not new as well. According to NASA, nine of But one might wonder whether they(there have been financial crises and the ten hottest years on record have can continue to do so and to increaseearthquakes before), recent events occurred since 2001,4 years in which their de facto financial liability in thehave been much more global in nature. we witnessed many large-scale future, as budget deficits persist andThis is the inevitable flip side of the floods, storms and droughts. as the financial burden of their debtever-growing globalisation of social becomes unsustainable, economicallyand economic activities. Twenty or One easy solution would be to make and politically. So this is also a matter30 years ago, a large earthquake and sure people do not live and work in of establishing more efficient financialtsunami in Japan or a massive flood in harm’s way, but this would be wishful management strategies in countriesThailand would have mainly been a thinking. There is typically a high exposed to natural catastrophes, i.e.Japanese or Thai issue. But today, such correlation between economic activities practically, most of the world.events affect businesses around the and exposure to natural disastersworld, directly through disrupted (because living near the coast hasglobal supply chains, and indirectly, obvious advantages), so such afor example, through an increased withdrawal from vulnerable zonesfear of nuclear risk. In a notable case is just not going to happen on ain point, Germany – Europe’s largest sufficient scale.economy in Europe – is planningto abandon nuclear power, which Who pays?provides about 17% of its consumedenergy, 2 in response to the So if increasing natural disasters areFukushima disaster. the new norm, as I recently wrote in the editorial of the review NatureSeveral socioeconomic factors have had recently, it begs the question of whoan influence on the escalating levels will pay for these increased lossesincluding rapidly increasing population, and how better to organise risk-sharinga higher degree of urbanisation and mechanisms before other large-scalehuge growth in value at risk. Take the disasters happen.east coast of China. We could very wellsee a massive typhoon hitting Hong In response to these historic losses andKong, Shanghai and then Dalian this increasing exposures, we are alreadyyear. The ripple effects would be witnessing a radical change in the lossworldwide and extreme. Or take the sharing between public and privatestate of Florida in the US, one of the sectors in many countries, withworld’s hurricane peak zones, where governments taking a more importantthe population increased about 600% role in what were traditionally privatein the past 50 years. Today in the US, insurance markets and where they exist.a staggering $15 trillion of assets is Insurance markets are typically heavilyinsured in coastal counties alone from regulated and private insurers haveTexas to Maine.3 Many more people already severely reduced theirin harm’s way means more exposed exposure in many high risk zonesassets, too. Mathematically, the same because they are not authorised byhurricane that had mild effects 50 regulators to increase their premiumsyears ago would be catastrophic today. as they would like to.2 International Atomic Energy Agency statistics, updated 19.03.123 Data from Karen Clark and Company (2012). Insured Property Values in the US.4 http://www.nasa.gov/topics/earth/features/2011-temps.html Resilience: Winning with risk I  9 
    • Alternative risk transfer Figure 1 Simplified structure of a catastrophe bondinstrumentsSome of the most innovative and Potential investorssustainable solutions to meet thechallenge of providing adequate Payment of interest and Investment in the principal of the cat bondcoverage against extreme events might (at maturity; no disaster) dedicated cat bondcome from the financial world, working Contract with special-purpose vehicle BigCat (Issuer)in collaboration with governments (principal invested in safe investments)and the insurance industry. Disaster claims PremiumsSome of the ART instruments to make (investors lose their investment)this possible include catastrophicbonds and weather derivatives are ProactiveOrg (Sponsor)already in place. They provide the Provide the firm or government with rapid capital post disasternecessary capital to support a financial High value if rigid budget proceduressafety net that helps individuals, Fast financial aid (the cash is disbursed in a few days)corporations, cities, countries andinternational organisations adequatelyprotect exposed assets so that they Advantage for the issuer Advantage for investorsare resilient when the next On the other side of the transaction Premiums collected from ProactiveOrgcatastrophe strikes. (see Figure 1), SPV BigCat raises will be used to provide the investorsThe field of ART grew out of a series capital by issuing a catastrophe bond. with a high enough interest rate toof insurance capacity crises in the The investors’ funds provided in compensate for a possible loss of their1970s through to the 1990s, which led exchange for the bond notes constitute principal should a disaster occur.purchasers of traditional reinsurance the initial principal of the bond and One of the main advantages forcoverage to seek more robust ways to will be placed in safe investments. investors is that these instrumentsbuy protection. Catastrophe bonds The bond pays in the case of a constitute a class of assets that canare one type of insurance-linked triggering event, as defined by the enhance their returns since theyinstrument that has significantly specifications of the issued bond are not highly correlated withgrown in volume in recent years and is (for example, an earthquake of other financial risks (for example,likely to continue to grow as a market moment magnitude (Mw) 7.0 or fluctuations in interest rates, if theas we witness more and more costly greater in a specific city or region economy is in a recession or a boom).catastrophes in the coming years. of the country, or a major storm with highest sustained wind speed greaterTo illustrate how these bonds work, than 150 km per hour in a specificconsider an organisation (this can also location). The payout could also bebe a country), ProactiveOrg, which indemnity triggered: Depending on thewould like to cover part of its exposure level of loss incurred by the companyagainst catastrophes. To do so, it or government, interest on the bondcreates a dedicated company, BigCat, or the principal, or both, is forgiven.whose only purpose is to finance In that case, these funds are then quicklythe disaster costs of ProactiveOrg. released to ProactiveOrg to help coverNotably, BigCat is an independent part of its loss from the event. Anothercompany (typically located in Bermuda key advantage for a firm, municipalityor the Cayman Islands where the tax or country in issuing a cat bond is thattreatment is more advantageous). In the money is ready to flow in just a fewthat sense, BigCat is a single-purpose days or weeks, depending on the forminsurer (also called a special-purpose of trigger. By design, the capital of thevehicle, or SPV) for ProactiveOrg. bond is commonly invested in risk-freeWhen the insurance contract is signed, assets, such as US Treasury moneythe sponsor (ProactiveOrg) pays market funds. As a result, there ispremiums to BigCat. limited credit risk.10 I  Resilience: Winning with risk 
    • Once viewed as an alternative source The value of the asset depends on Investors find these instrumentsof financial protection for reinsurance the number of hot days or rainy days attractive because they provide themand insurance companies familiar with in a city, for instance. This market with high enough interest rates tothe risks and eager to diversify their is expanding fast too as economic compensate for a possible loss ofexposure, catastrophe bonds have now returns for a lot of businesses in many their principal and because this classbecome another family of investment countries are highly correlated with of assets is not highly correlatedproducts for alternative investors, such the weather (e.g. agriculture, energy with other financial risks, such asas hedge funds, dedicated funds and and tourism) and also because the fluctuations in interest rates.also money managers, pension funds market is becoming more liquid.or insurance companies. Given the More countries are now investing in The coming years are set to seecurrent low-interest rate environment modern weather stations with live further innovation and collaboration.and high volatility of markets, these recording that can be used to develop The OECD (which focuses on high-new assets could develop even more. these financial instruments further. income countries) and the World Bank In 2011, PwC estimated the total (which focuses on low income countries),Since its inception in the early 1990s, weather derivatives market to be both of which I advise on strategicthe catastrophe bond market has $12 billion and growing. development, have now establishedgenerated about $45 billion of cumulative dedicated expert teams to work closerissuance.5 While most of it was to Dynamic risk solutions with governments around the worldcover insurers, reinsurers, other firms on these issues. Several banks, hedgeincluding Universal Studios, Disney, In conclusion, risk financing is a key funds, money managers and consultingÉlectricité de France and Dominion, pillar of any comprehensive strategy firms now do the same for corporatealong with several governments aimed at strengthening resilience. clients. Disaster financing became a(California, Florida, Turkey, Taiwan Designing a tailored solution based on priority for the G20 last year and I wasand Mexico) have now used their a business or government’s needs is pleased to address the G20 on theown cat bonds for state-run disaster critical to enabling them to contend with topic. My Wharton colleagues and I,insurance programmes. There are also a more volatile and uncertain world. who have been working on the WEFdiscussions now about linking ex The continuing development of ART is Global Risks Report since its inceptionpost risk financing with ex ante risk therefore encouraging, demonstrating in 2006, look forward to fruitfulreduction efforts – a portion of the how innovation can thrive in the face discussions on effective resiliencenominal could be invested in reducing of new and escalating challenges. with world leaders at the 2013 annualthe exposure over time, which would A key benefit is the ability to extend meeting of the World Economiclower the expected loss. the capacity for absorption of losses Forum in Davos as well.Weather derivatives are another beyond insurers and governmentsfinancial innovation that can be used into the capital markets.by organisations as part of a riskmanagement strategy to reduce riskassociated with adverse events orunexpected weather conditions.5 Kunreuther and Michel-Kerjan. At War with the Weather. MIT Press, 416 pages. Resilience: Winning with risk I  11 
    • A new framework for disasterreduction By Carlos Castillo, Lauren Cook and Oz OzturkPwC and UNISDR (the UN Office for Disaster Risk Reduction) are Carlos J. Castillo leads PwC’s disaster risk management services for the public sector,developing a collaborative framework for disaster reduction providing homeland security and emergency andintended to contribute to improved disaster resilience and provide disaster management advisory services to theeconomic, social and environmental benefits globally. Federal Government and others. A Certified Emergency Manager (CEM), Castillo brings more than 30 years of emergency and disaster management experience at the local, state, Federal and international levels. Prior to joining PwC, Castillo served as FEMA Assistant Administrator and led the Disaster Assistance Directorate, responsible for the disaster declarations process, Individual Assistance, and Public Assistance. Castillo has authored several articles on disaster management and lectures on the topic internationally.The subtitle of this journal, ‘Winning In December 2012, the Business Council Lauren Cook is a senior associate focused onwith risk,’ emphasises the opportunities for the United Nations – supported by issues of sustainability, corporate socialthat arise from conflict and change. But PwC – brought together representatives responsibility and business interruption. Heranother critical motivator of resilience from both private and public sectors to work at the firm has also included projects inis risk-reduction. The stunning toll of discuss “Disaster Risk Management: Banking and Capital Markets and National Advisory. As the current president of the Newnatural disasters on lives, businesses Preparedness and Resiliency.” York City Green Team, she leads a growing teamand national economies has spiked Representatives from UNISDR, UNDP of 150+ members who are making a positiveinterest in finding ways to sustainably (United Nations Development impact on the office, the surrounding communityreduce and manage disaster risk. In Programme), Wal-Mart, Citigroup and and the environment.2011, in Thailand alone, floods shut Government amongst others, shared Oz Ozturk is a partner in PwC’s Consultingdown 1,000 factories and forced more their views on how they are working team and is the global leader of the UNISDR & PwC initiative on establishing private and publicthan 700,000 people out of work. In together to improve the resilience efforts best practices in disaster management and2012, floods, typhoons and of communities around the world. resilience. He leads the Strategy, Operations &earthquakes caused more than $274 Technology consulting group based in Geneva,billion of economic losses in Asia. In We define resilience as the ability to specialising in Business Strategy andOctober 2012, when Hurricane Sandy recognise, take, and rapidly and Transformation, Digital & Consumer Behaviour,ravaged the North-Eastern United effectively adapt to changes.1 In the and Supply Chain Optimisation. Ozturk holds a context of disaster, preparedness for Master’s degree from Stanford’s Graduate SchoolStates coastline and impacted densely of Business and is a chartered accountant. He haspopulated areas in its path, it was a different conclusions elevates the level over 20 years experience in Managementpowerful reminder to the public and of resilience. There is not one Consulting having worked for Coopers &private sectors, to governments and preparedness approach that will fit all Lybrand,  IBM, and PwC in senior leadershipbusinesses alike, that is was time to outcomes. However, there are some positions supporting his clients in a trusted common preparedness techniques – advisor capacity. In addition to his consultingact – together. expertise, he has held executive positions within communication among key officials in industry as a CEO and CIO within the logistics the public and private sectors, testing of sector and as a Solutions Vice President for a infrastructure, education efforts – that global software company. can be applied no matter the circumstance.1 http://www.pwc.com/en_GX/gx/governance-risk-compliance-consulting-services/resilience/assets/resilience-issue-2.pdf12 I  Resilience: Winning with risk 
    • Figure 1 Disaster risk management framework Being prepared saves lives, and money According to one panellist, “For every dollar spent on mitigation and preparedness activities the ROI is between $4 and $11.” At either end of the range, the investment is worth it. While preparedness efforts aren’t as high-profile or visible as response and recovery efforts, they are ultimately more effective.UNISDR and PwC – Working together to reduce disaster risksA framework to combat the There is a clear benefit for the public International Airport for naturaldevastation before it starts sector when it comes to these disasters. Beirut has the only partnerships. As for corporate sector operational commercial airport in thePwC has been working with UNISDR for parties, their increasing country, and the US had exports worthclose to a year to collect and analyse interdependence with their over a billion dollars to Lebanon indata about these preparedness communities and the public sector 2011 alone.techniques and develop a framework means they gain more than just goodthat can be applied around the world. PR from partnering with other Joining forces in Florida – A USThe insights and best practices from this organisations to create more resilient example with global implications wasglobal study will be used in conjunction communities. Steve Dozier, Vice shared by Castillo from his experiencewith the UN’s 2013 Global Assessment of President, Wal-Mart, highlighted this in as Miami-Dade County’s, Florida,Risk report to be published in May. The terms of the interdependence of its emergency management director. ThePwC global study itself, led by PwC associates, stores and communities County formed alliances with localPartner Oz Ozturk, will be available as a following a disaster. He noted that the universities and corporations to hardenstandalone detailed report early this more rapidly their stores and other their facilities against hurricanes,year. The findings will be used to businesses can reopen and provide thereby reducing the need forestablish better alignment between the critical goods and services following a additional evacuation shelters forprivate and public sector for disaster disaster, the more resilient communities students and staff.prevention and set the scene for the soon become. For communities to recoverto be updated Hyogo framework in 2015. Skilled up students – The Japanese quickly, Wal-Mart has to be prepared to government taught junior high and support its own employees enablingAs the number and severity of natural elementary school students survival them to return to work sooner. Rapiddisasters increases at an alarming rate, skills that helped during the 2011 recovery also relies on the government’sthis framework provides a pragmatic Tsunami. help when it comes to assisting theapproach to combat the devastating private sector with crucial Keeping money mobile – Citi’s mobileimpact before it starts. At the event, I infrastructure needs. banking was so user-friendly that it(Carlos Castillo) boldly claimed that, “alldisasters are preventable.” We say this generated $10 million in transactions Partnerships that have during Hurricane Sandy.because we believe disasters can beprevented through risk-based increased each others’ preparedness Combining the intelligence andpreparedness and mitigation efforts, experience underlying these examples,leading to enhanced resilience. The Recent examples of PPPs (Public Private the PwC and UNISDR initiative seekspower of the PwC and UNISDR Partnerships) provide realistic hope for to produce an applicable globalpartnership is that it incorporates all the success of the global framework. framework – with possibly far-reachingleading practices from the private sector economic, social and environmentalon a global scale with the UNISDR DHL against disasters – DHL instructed implications – for preventing orleading practices in community disaster UN officials on how to prepare Beirut’s recovering from disaster.risk reduction. Resilience: Winning with risk I  13 
    • A CEO’s perspective on resilience: An interview with Shikha Sharma - Axis Bank Limited, India Q. How would you rate your bank’s ability to adapt to changes or disruptive events now, as compared to the past? Shikha Sharma (SS): One of the things that we’ve attempted to do is to reduce response times, enabling us to adapt and change rapidly if circumstances require it. We have got better at that. Q. What changes are you making to enable your bank to adapt quickly or effectively to external changes? Shikha Sharma SS: We are doing two things to help us adapt quickly to external change. The first is Axis Bank Limited, India communicating a lot more with the team: if growing numbers of people understand more parts of the bank that helps change happen more easily. Because when change happens it doesn’t impact just one slice of the bank, it impacts the whole organisation. And if people understand each other, then implementing that change becomes easier. The second thing we like to do is really work with partners. So, we don’t try and do everything ourselves. This dissipates the impact of the change and you have to absorb a little less. And if you work with high quality partners they help you manage some of that change. So those are the two things that we are currently focused on. Q. Do you feel the influence of the bank’s stakeholders – employees, customers, government, regulators, users of social media – has changed? And which of these groups has grown more in influence? SS: Unfortunately, the influence of all these stakeholders has increased. I think regulators have become a lot more alert and active in a fast changing environment where some issues have cropped up. And a lot more knowledge is being shared among consumers. This means that consumer experience spreads much faster today than it might have done in an era of less connection. The same thing applies to employees: they live in a connected world and communicate through numerous networks. So the word about change spreads much faster. And, of course, you are constantly under media scrutiny. There are many channels that you have to worry about. Q. Are you changing the way you’re connecting with these stakeholders? SS: Connecting with stakeholders is fundamentally about communicating openly and sharing information. So, one of the big changes that I have seen over my years in the financial services sector is that today there’s a lot more openness about the way data is shared in an organisation. I think that helps the organisation to adapt, it helps to bring change and it enables us to garner the knowledge of many more people rather than just the select few who had access to that data in the past. Q. In response to stakeholders, have you increased your focus on areas where your bank can have a wider impact on the communities in which you operate? SS: As the bank gets larger I think it becomes even more important for us to be conscious about the impact we have on the community and what the community thinks about us. As part of our active programme of working with communities, we have set up the Axis Foundation, and contribute 1% of the bank’s profits to it. Instead of trying to work in many different areas, what we have chosen to do over the last couple of years is to focus primarily on helping to give people access to library books. The idea is that if we can bring economic prosperity to the poorer sections of society, then that’s good for both the economy and the community.14 I  Resilience: Winning with risk 
    • Business-not-as-usual:Tackling the impact of climatechange on supply chain riskBy Richard Gledhill, Dan Hamza-Goodacre and Lit Ping LowWhile climate change and increasing temperatures now seem Richard Gledhill leads PwC’s global climate change network. He specialises in climate policy,inevitable, there are high levels of uncertainty about the manifestations carbon markets and climate finance. Gledhilland magnitude of their impact. What is certain, though, is that climate advised on some of the earliest, largest transactionschange will have a multiplier effect on supply chain risk. By looking in the Clean Development Mechanism and has remained active in the carbon markets, alsoclosely at the nature of a sector and the concentration of supply, it is advised a number of donor governments andpossible to gauge the magnitude of the impact, with agricultural multilateral agencies on climate finance. He is a member of the Network Council of thecommodities such as wheat, maize and especially rice more subject to Climate & Development Knowledge Networksupply change disruption than petroleum, gas, metal ores and scrap. and a director of the International EmissionsEffective ways to manage the supply change disruptions created by Trading Association.climate change risks centre on three principles: 1) recognising that Dan Hamza-Goodacre is an Assistant Directorthe risks cannot be viewed in isolation due to their interconnectivity; in PwC’s sustainability and climate change team.2) ensuring that the appropriate risk management procedures are He has 15 years of experience working in the public and private sectors on strategies, policiesin place including scenario planning; and 3) developing global and programmes for climate change. Dan is currentlycollaborative strategies to deal with heightened international head of the £10m climate negotiations support programme for CDKN for the UK Government,resource scarcity. and leads PwC’s work on climate change and agriculture. Prior to PwC he spent six years with the UK Environment Ministry in various roles including Head of the Secretary of State’s office, lead policy official for the government’s adaptationIn 2010, Russia suffered a severe heat disruption (e.g. wheat shortages), both legislation (Climate Change Act).wave. The resulting economic losses man-made (export restrictions) and Lit Ping Low is an Assistant Director in PwC’swere estimated to be US$15bn as natural (weather, drought, etc.). What sustainability and climate change group. Lit Pingdrought and wildfires destroyed crops, is changing is the complexity of the is an economist working on climate change policyparticularly wheat. The knock-on risks, their interdependence with other and regulatory issues with governments and the private sector. Lit Ping has also co-authoredeffect was export restrictions on risks and the wide-reaching, contagious a number of publications aimed at business andwheat in Russia, which contributed impact they have (e.g. global price rises). policymakers on climate change including theto global price increases. Low Carbon Economy Index (PwC), Policy But the other major factor set to Maker’s Guide to Green Growth (CDKN) andAnticipating and responding to risks exacerbate supply-chain risk is climate Business Leadership on Climate Changeis business-as-usual for all sectors. change. Often overlooked, climate Adaptation (UNFCCC).This example is from the agricultural change adds to complexity. It amplifiessector. It is one of many one could or alters existing risks, for examplechoose from sectors that are dependent raw material availability (e.g. water,on physical produce, such as agricultural, energy) or transport disruption due tofuel or mining and metals commodities. extreme weather events. The resultingThese industries are no strangers to shocks on the global supply chaindealing with the risks of supply-chain can be severe and persistent. Resilience: Winning with risk I  15 
    • So climate change is a ‘risk multiplier’. Every year, government representatives Which supply chains need toBut businesses have yet to gain the full from around the world meet at the UN strengthen their links?measure of its effect on their supply Framework Convention on Climatechains. How serious? How soon? Change (UNFCCC). They have agreed What is the likelihood that climateHow likely? How wide? to limit the average global temperature change risk could disrupt certainHow to mitigate? rise to 2oC, and identified actions to supply chains? To answer this mitigate, and adapt to, climate change. question, we have analysed theToo late for two degrees? In spite of these efforts, carbon threats posed by climate changeHow serious is the risk of climate change emissions have continued to rise. to a selection of commodities:from increased temperatures? It is In 2011, emissions levels were the • agricultural (wheat, maize and rice)not such a far-fetched issue as many highest ever recorded. Can we reallythought. The latest update from the limit the temperature increase 2oC? • energy (petroleum and gas)World Bank is that the global mean PwC’s latest Low Carbon Economy • mining (metal ores)temperature has already increased Index suggest that based on currentby 0.8oC above pre-industrial levels. progress, this is ‘highly unrealistic’. We have looked at the two majorWe can also look at estimates of factors that have the greatest One thing is clear though, businesses influence on risk exposure:global insured losses from major and governments need to startextreme weather events. In the last planning for a world with a changedtwo decades losses have increased climate. In particular, industriesmarkedly, averaging tens of billions dependent on food, water, energy orof dollars annually.1 ecosystem services need to scrutinise the resilience and viability of their supply chains. A 2oC vs. 4oC world How soon will things happen? The UN Intergovernmental Panel on Climate Change (IPCC) has projected that every continent will feel the impact of even a 2oC warming scenario by the 2020s. Water availability and quality will be affected in many regions, with a domino effect on agriculture and health. The frequency and intensity of extreme weather events may increase in many regions. Small island states and lesser developed countries are least likely to be able to cope. Scientists, for example those at the World Bank, are starting to map out what a 4oC warmer world would look like. The full scope of damages is still unclear, although implications on human security, economic and trade systems are all likely. When the world experienced a 4oC global average temperature change in the past, it took millennia, not a century.1 Munich Re: Great weather catastrophes worldwide 1950–2011, as of January 201216 I  Resilience: Winning with risk 
    • 1. The magnitude of impact of We have mapped these factors in • Rice production stood out as the climate change on the Figure 1. It shows the extent to which commodity that is both expected to commodity: the top five country exporters of these be affected by climate change and commodities are exposed to climate highly concentrated in production. This depends on: i) how susceptible change impacts (vertical axis), As the impacts of climate change on a commodity is to the effects and the degree of global supply rice are increasingly felt in South and of changes in temperature and concentration of these commodities South East Asia, the global supply of precipitation, rise in sea levels and (horizontal axis). rice could be significantly affected, occurrence of storms and flooding; as buyers have little alternative and, ii) how able the supplying Rattling the supply sources of supply. country is to cope with the potential chains of rice effects of climate change. This is • Maize and wheat are also relatively Our analysis, which uses projections based on factors such as political concentrated in supply, but the for the 2040s, indicates the stability, governance, macro- effects of climate change on these following: and socioeconomic development crops are projected to be relatively of a country. • The supply of agricultural less severe. A concentrated supply commodities (maize, rice and base for maize means that any2. The concentration of suppliers: disruption to its major producers wheat) is more concentrated than that of the other commodities (from climate change or otherwise) In general, where a commodity can considered (petroleum, gas and can have a pervasive global impact. be sourced from a diverse range metal ores). This is dictated by the Its role as feedstock also means that of suppliers, supply disruption climatic conditions in Asia (rice), implications of supply disruptions on can be lessened as buyers turn to North America (maize, wheat) global food prices can be significant, alternative suppliers. Conversely, and South America (wheat). as was evident in the US droughts where a commodity is concentrated in 2012. in a small number of suppliers, disruption for any one major supplier • The diversified supply of petroleum, can have global implications. gas and metal ores means that supply issues in any one supplier are unlikely to trigger widespread disruptions. The supply availability of these commodities is more likely Figure 1 Climate change: impacts and diversification, selected key commodities to be disrupted by other risks than by climate change. These include 60 Higher magnitude implies more severe Size of bubble indicates value of the finite nature of such resources, climate impacts for top 5 countries imports for top 5 global exporters Rice technological capacity and politics. 50 But the effects of climate change are likely to interact with these other Magnitude of impacts 40 factors and lead to an amplification Petroleum of risks globally. Commodity price Gas 30 volatility can be exacerbated not just Metal Ores & Scrap by more frequent or severe extreme 20 weather events, but also by the Wheat Maize accompanying political or policy reactions. 10 Higher concentration implies more difficult to switch 0 0 0.1 0.2 0.3 0.4 0.5 0.6 Concentration of supply (HHI) Source: PwC Resilience: Winning with risk I  17 
    • Figure 2 Commodity supply chains at a glance Commodity Global market 2011 Top 5 exporters Exposure to climate change Rice $23.3bn Clustered in South and South High water intensity and specific climate requirements make East Asia, led by Thailand rice exposed to changes in temperature and precipitation. (28% of global exports), These elements, as well as extreme weather conditions such followed by Vietnam, India as storms, pose serious threats to the supply chain of rice. and Pakistan. The US is The key exporters are also vulnerable to rising sea levels. the 5th largest exporter. Wheat $48.3bn North America Climate changes in temperature can have a positive effect on the (US, Canada), wheat yields in North America but are likely to have the opposite South America effect in Europe, Australia and South America. However, rising (Argentina), sea levels and greater occurrence of heavy rains and storms Europe (EU) threaten all top 5 exporters. and Australia. Maize $23.6bn US, Argentina, Brazil, Increases in temperature are projected to improve harvests in the Ukraine and India. US as well as other leading maize exporters (the 2012 droughts in the US, however, defied this projection). However, extreme weather conditions and storms pose damage risks which could lead to volatility in supply and therefore global food prices. Maize plays an important role in the food chain, as it is used for feeding livestock. Its availability affects the agriculture sector significantly. Metal ores $389.4bn Australia, Brazil, US, Mining operations display different sensitivities to environmental Including: Chile and Canada. conditions depending on the type of material and the geographical High-volume bulk location. Recent severe weather events have caused damage to mining infrastructure and transport disruption particularly for Commodities: bulk products. Water shortages can also affect the costs of copper, iron, bauxite extraction, which is often water-intensive. Lower-volume, high value commodities: chromium, nickel Petroleum $2667.5bn for Largest exporting regions: Most of the key exporting countries have a combination of offshore and gas petroleum and the Middle East and Russia; and onshore extraction and transportation infrastructure e.g. oil related products additional suppliers: rigs, oil wells, and pipelines and liquefied natural gas facilities. North America and parts $319.5bn for gas Extraction of oil and petroleum-related goods can be affected by of Europe, Africa and extreme weather events. The melting permafrost and ice flow South East Asia. patterns in the Arctic can destabilise infrastructure foundations. Sea level rise (and associated changes in ocean swell height or storm surges) can also affect both onshore and offshore activities. Source: PwC analysis1 Munich Re: Great weather catastrophes worldwide 1950-2011, as of January 201218 I  Resilience: Winning with risk 
    • The multiplier effect on Figure 3 Supply chain disruptions: the contagion of impacts from a single eventa global scale Events Contagion of impactsHow far-reaching will the effects be? Heat wave and Estimated economic losses from Russian heat wave at US$15bnAlthough the analysis focused on drought in Russia including the destruction of crops (mainly wheat) from the (2010) drought and wildfires.projected impacts, recent events havealready demonstrated the ripple-effect globally. Extreme heat waves inRussia and the US, and other extremeweather events such as flooding and Drought in the US A combination of dry conditions and extreme heat includinghurricanes, showed how one event (2012) record-breaking temperatures over the summer months, ledin a country or region can have to destruction of agricultural crops.repercussions globally.2 Scarcity of feed stock (corn) further affected meat and dairy prices. Global food prices soared by 10% between June and July 2012, according to the World Bank. Flooding in Forty percent of the global production of hard disk drives (HDD) Thailand (2011) is concentrated in Thailand. The flooding of manufacturing plants led to global price increases of HDD and the electronics dependent on them. The flooding of car manufacturing plants led to local and international disruptions, resulting in the postponement of the launch of new car models for some companies. Insured losses were estimated at $15–20bn. Much of this is covered by insurers (and reinsurers) outside of Thailand. Business continuity claims make up a significant proportion of losses. Flooding in Forty mines were affected by floods, including disruptions in Australia (2010–11) transporting coal from mines to coastal ports for exports. Major global coal mining companies declared force majeure, legally releasing companies the obligation of contracted deliveries. Source: PwC analysis2 Experts continue to debate if some of these events can be scientifically linked to climate change. Scientists suggest that in the absence of climate change, the extreme heat waves in Europe, Russia and the United States would happen only once every several hundred years, adding to the evidence base that climate change is having an impact. Meanwhile, the flooding in Thailand, while considered severe and low probability, is believed to be not related to climate change. Resilience: Winning with risk I  19 
    • Multiplier effect needsmultilateral efforts Methodology and sources for analysis We used projections from the UK Met Office which assessed the exposureHow can organisations start to mitigate of these commodities to impacts of changes in temperature, precipitation,the potential disruption on supply rise in sea levels and occurrence of storms and flooding for each majorchains due to climate change risk? supplier. The impacts are projected for the 2040s.This year, the UN negotiations in Dohaconcluded with limited progress, For each country, we derived a vulnerability index. This reflects thewith current pledges still falling short ability of a country to cope with the potential effects of climate change.of what is needed. Businesses and This index is a composite index comprising the Worldwide Governancegovernments can improve readiness Indicators (WGI), the Human Development Index (HDI) and the GAINby adopting these three principles: Vulnerability index. It therefore provides an indication of the political stability, governance, macro- and socioeconomic developmentDon’t view risks in isolation. of a country.Businesses need to identify not just therisks emerging from the impacts of The vertical axis gives a ‘score’ of magnitude of climate change impacts.climate change, but how the resulting This score is attributed to each commodity by weighting the exposure ofimpacts interact with existing risks. the top five major suppliers by their share of exports, and is a measure of the magnitude of risk of climate impacts on the top five major suppliersStart scenario planning and put risk and adjusted by their vulnerability index. A higher score suggests thatmanagement procedures in place. the risk of disruption to supply from climate change is greater forGovernments and the business the commodity.community need to start consideringrisk management plans in a world The horizontal axis gives the Herfindahl index (HHI) for each commodity.with a climate change of not just 2oC, The HHI measures the share of global exports from a source countrybut also 4oC or even 6 oC. Effects are relative to the total export market. The HHI is an indicator of the amountalready being felt in some regions and of competition. The index is between 0 and 1, and a high numberthey are projected to worsen globally. suggests the supply is concentrated in a few source countries.Collaborate and give greater attentionto international resource security. Sources: 2011 data from UNCTAD database (commodity specific data and HHI concentration indexes), 2012 BP Statistical Review (gas and petroleum trade), Met Office Hadley Centre (2010)Competition for scarce resourcesmay intensify, and can be compoundedby political and economic developments.Developing a collaborative andsustainable resource managementstrategy at a global level can helpavoid the risks of ‘resource grab’and conflicts.20 I  Resilience: Winning with risk 
    • Creating value through responsibleinvestment: Are the hard and leangoing soft? By Shami Nissan and Malcolm PrestonIt is generally perceived that the private equity (PE) industry has Shami Nissan is an assistant director of PwC’s Sustainability and Climate Change team inlagged behind public companies in recognising the importance of the UK. Shami has worked exclusively in theeffectively managing environmental, social, and governance (ESG) financial services arena, with a wide varietyissues creating value for its shareholders. However, the ESG focus is of major clients in the private equity, banking and insurance sub-sectors. She has extensiveincreasing as the basic business model of the PE industry becomes experience of developing strategy, policy andmore long-term, with more than 90% of the respondents in a recent procedures for implementing a sustainabilitysurvey of the PE industry believing that ESG activities can create value. programme. She has also developed andWhile less than half have the necessary systems and reporting delivered multiple training engagements on ESG/sustainability. Shami’s work withframeworks in place to support this focus, such developments PE houses has included meeting with portfolioare a priority. So how can PE move up the ESG awareness curve company Board members and senior managementand what will be the impact on how the sector operates and teams to identify ESG risks and opportunities.generates returns? Malcolm Preston is global head of sustainability services at PwC. His role is to drive the understanding of sustainability and climate change throughout PwC to ensure the risks and opportunities associated with these issues are considered in the advice given to clients, including reporting and“We avoided 300 million so long ago that the PE industry assurance; complying with related regulation was viewed as somewhat ‘behind the and taxes; mitigation of and adapting to climatelitres of water use.” change; international development; investment curve’ compared to the corporate decisions; supply chain resilience (includingPerhaps not something you’d expect to sector. Are the notoriously ‘hard and integrity and security); and educating boardscome from the report of a large private lean’ softening in their attitudes and engaging employees on sustainability issues.equity house. But it did – from the 2011 towards ESG matters?cumulative results of KRR’s Green Port-folio Program (GPP), which it launched Cautiously optimistic, PwC spoke toin partnership with the Environmental the leaders of some of the largest PEDefense Fund (EDF) in 2008. houses in Europe and the US to find out more. Ninety-four percent of them saidIn the same year, Carlyle stated in their that their attention to ESG issues will2011 Corporate Citizenship report that rise over the next five years. It’s clearthe company expected to reduce costs that things are changing, but it isby approximately $1.8 million per year, still early days.and eliminate about 5,000 metrictonnes of greenhouse gas emissions Is it possible though, that the industryand 440,000 pounds of waste annually. could accelerate its responsible investment (RI) journey? And if so, asWhat’s going on in the corridors of the PE industry starts to identify value,private equity (PE) houses? When it and measure and report on its ESGcomes to environmental, social and efforts, could there be some sharedgovernance (ESG) issues, it wasn’t learning for all. Resilience: Winning with risk I  21 
    • So why this PE interest in • Forty-seven percent do not report 1) Shift the paradigm – andresponsible investment? publicly on their ESG programmes then don’t forget the carrot or their RI strategies.It’s the story of the stick and the carrot. If we can see things differently, change This stems from the nature of the can start to happen. Ninety-fourInvestor pressure was the main catalyst industry. Since they invest ‘private’ percent of PE houses are now startingcited by some PE houses we spoke to. capital, PE houses have been under to see differently – ESG activities areIndeed, 88% said they believe that less pressure (political, regulatory opportunities for value creation, notinvestor attention to ESG issues will and stakeholder) than their listed just matters of risk and compliance.rise over the next five years. So the counterparts to show accountability But have they focused enough on thatpressure is real and it’s not going away. and transparency. But, as they told carrot yet, or are they still moreIncreasingly, in a competitive concerned about the stick? us, this picture is changing rapidly.fundraising environment, a robust RI Limited partners (LPs) are upping thestrategy may be a source of competitive Let’s look at due diligence. pressure for greater transparency.advantage, helping PE houses tosecure access to capital. Survey All survey respondents say they do So take note all you existing and futurerespondents also said that risk some type of ESG due diligence, investees of PE houses!management, cost savings, ‘tone pre-acquisition. This could befrom the top’ and regulatory pressure The PE industry may be playing misleading though. All PE houses willwere important drivers. ‘catch-up’ but leverage is what it does. carry out ‘traditional’ environmental, Even though many PE houses say that health and safety due diligence,The good news is that they can also see the lack of in-house capacity/expertise typically at a site level. Things likethe money. A resounding 94% of the is a barrier to implementing an RI contamination liabilities, asbestosparticipants surveyed believe that ESG approach, they can learn from those risks and environmental regulatoryactivities can create value. They see compliance have all been at the centre who have already paved the way. Theythe carrot. A growing number of PE of specialist investigations in the past. can avoid pitfalls and potentially makehouses are being proactive about the This is mainly about checking for any progress at a faster pace. Without theESG risks and opportunities of their financial implications that could scrutiny of quarterly reports that listedportfolio companies. How can they impact investment economics; or for companies face, PE houses can makecreate value from ESG matters? What legal and compliance reasons; or to change happen fairly rapidly in theiropportunities can they find? This is a uncover liabilities that would expose portfolio companies, through theirstep change from their seeing ESG the PE house. It’s still about the stick. ownership status and their presenceissues as solely about risk and on company boards. Of course, this type of due diligencecompliance – the stick. still has to be done. But adding ESG As we have continued discussingIt’s work in progress – but due diligence paints a fuller picture. ESG matters with more and more PE It identifies a broader range of issuescould it change fast? houses, our survey findings continue like climate change or water scarcity.Whatever they say about their to be reinforced. Over the coming These might impact the quality,increased attention to ESG matters, years, we can expect an increasing availability or price of raw materialsour survey suggests that it is still number of case studies and ESG in the future. ESG due diligence‘work in progress’ for PE houses. success stories from the PE industry. considers opportunity: new markets;Of those we surveyed: income streams; eco-efficiencies; What’s needed for RI new resources; employee motivation;• Fifty percent lack a policy on ESG strategies to flourish? employee loyalty. It’s about the carrot issues and/or RI. There are things beginning to as well as the stick.• Only 40% have put systems in place happen that we’d like to see more of. These kinds of ESG due diligence to measure value created from Practices that could enhance the value findings then need to be built into the initiatives (this is particularly of responsible investment strategies 100-day plan (or other targets). If this relevant for initiatives addressing across the board, whether you’re a PE doesn’t happen, there’s a risk that ESG environmental and social issues house, an investor, a limited partner, action points will be sidelined as niche which tend to have more a portfolio company, or sitting in issues. They won’t be integrated into direct impacts). another industry. core business strategy and practice. ESG value creating opportunities will be missed. The carrot forgotten.22 I  Resilience: Winning with risk 
    • 2) Measure the financial value portfolio companies. But they’re usingcreated – yes, tangible and qualitative techniques. They can’tintangible attribute value in financial terms to any improvements, but they can stillWhile 94% see that ESG activities can build a picture of progress. They cancreate value, only 40% are measuring also compare performance companyit. What’s more, the things that are -to-company, and year-on-year.being measured quantifiably tend tobe the ‘easier to measure’ energy Interestingly, houses that areefficiency initiatives. monitoring and reviewing ESG performance at a portfolio level arePE houses such as KKR and Doughty increasingly asking the portfolioHanson have successfully measured companies themselves to pay for thecost savings from eco-efficiency cost of carrying out these reviews.initiatives including waste reduction, This is partly because they recogniseraw material reduction and reduced that ESG management is about valueenergy/water use. This is data that creation as well as risk managementcan be expressed in financial terms. and compliance.However, even the more advanced PE So what’s the answer? Use existinghouses are struggling to measure the valuation methodologies. These canless tangible benefits of ESG issue effectively quantify both the intangiblemanagement. Why is this? and tangible value from managingIt’s difficult to get the information. environmental and social issues.To measure value created from This kind of valuation exercise firstenvironmental and social initiatives requires access to data though.you need relevant financial data. PE houses must have the ability toFor most PE houses this is not yet systematically collect relevant ESGreadily available at a portfolio level. and financial data from their portfolioMany interviewed said they’re not yet companies.collecting ESG data systematicallyfrom portfolio companies. As we saw at the beginning of this document, some PE houses are startingOther PE houses are measuring and to capture and report impacts more fully.monitoring ESG improvements at their Let’s take a further look at KKR. In 2008, KRR launched its Green Portfolio Program (GPP) in partnership with the Environmental Defense Fund (EDF). The GPP is an operational improvement programme. It uses an ‘environmental lens’ to assess critical business activities for KKR’s participating private equity portfolio companies. In 2011, KKR reported the following cumulative results from the programme: • Financial savings of more than $365 million • Avoided 810,000 metric tonnes of GHG emissions • Avoided 2.2 million tonnes of waste • Recycled more than 462,000 million tonnes of waste • Avoided 300 million litres of water use Resilience: Winning with risk I  23 
    • 3) Ramp up reporting – for the But soon case studies won’t be enough. corporate sector on sustainabilitysake of all stakeholders LPs are paying much more attention reporting and integrated reporting. to the data they are getting from PE Which key performance indicatorsThere has been a trend among some houses. They are asking more of them (KPIs) should be included in reports?PE houses to report ESG progress in their questionnaires. They are What metrics can be used to measureon a case-study basis. This can be a pressuring for more transparency intangible value from ESG activities?particularly effective reporting tool in ESG-related information. Here’s an example:post-exit, to show the value createdwhile the company was owned by The good news is that PE houses canthe PE house. benefit greatly from the progress in the What’s the issue? What’s the KPI? How is it measured? Environment: climate change Greenhouse gas intensity Tonnes of CO2 per annum/$ revenue Social: employee attraction and Job creation or employee turnover Net number of jobs created or number retention of jobs replaced Governance: bribery and corruption Percentage of employees (for whom bribery Total percentage of employees (for whom and corruption is a relevant issue) that have bribery and corruption is a relevant issue) completed training that have completed training in the last 12 monthsThe second piece of good news is that report similar, but different, information At this aggregate level, sector-basedPE houses can share this knowledge to individual LPs. CalPERS is doing ESG issues and opportunities willeffectively across their portfolio companies just this by developing a ‘Manager become apparent. By sharing theduring the hold period. They can Assessment Tool’ to help its manager insight from the integrated reportsstrive for consistent reporting from all selection process by ranking managers back through their portfolio companiesportfolio companies. They might host on key ESG issues. they can create a domino effect ofknowledge-sharing conferences for sector-specific learning.portfolio companies to learn from each Are we brave enough to goother. They can call on specialists to this far? PE houses will have enhanced theirhelp transition portfolio companies understanding of the most useful KPIs So, fast-forward a few years. PE companies to include in an integrated report fromthrough the process. are taking a strategic, value creating a sustainable accounting point of view.Some PE houses have already set mini- approach to ESG issue management. They can share these with the industrymum ESG reporting metrics or KPIs They have increased their knowledge actors in the corporate sector.such as the ones above. They expect through innovative partnerships withportfolio companies to measure, monitor NGOs. Deal teams have been trained Limited partners could use the insightand report upwards, based on these. on responsible investment. There’s gained from their private equity invest- more structure around measuring and ments to the benefit of their publicWith consistent reporting in place, reporting the value of ESG programmes. equity ones. And as LPs start demandingthe PE house gets a view of individual Portfolio companies are enjoying the integrated reports and using the PEcompany progress over time. They can benefits of a proactive ESG approach. model for their public equity assetalso compare, company-to-company, LPs are receiving transparent, managers, they would drive furthertypically within a given sector. insightful information. transparency in ESG-related information.As they become more sophisticated in At this point the PE industry could bereporting, PE houses can engage more in a position to give something back.proactively with LPs. They can work Sitting atop integrated reports, consol-together to shape and streamline future idated from across their portfolioRI reporting to them rather than being companies, using a consistent set ofon the back foot and struggling to KPIs gives them a great advantage.24 I  Resilience: Winning with risk 
    • Approach to the survey Members of senior management of Interviews, unless specifically agreed each PE house were interviewed, and otherwise, were undertaken on aPwC spoke with 17 PE interviews were supplemented with non-attributable basis.houses including: desk-based research on each PE house• Six of the top ten largest global PE including consideration of company houses¹ websites and relevant reports (e.g.• Eleven of the top 50 largest global Citizenship/Corporate Responsibility PE houses¹ reports). Interviews were undertaken during the period from November• Six mid-tier houses 2011 through to January 2012, and• Ten with headquarters in Europe relied upon a common set of questions• Seven with headquarters in the US being posed to each participant.A CEO’s perspective on resilience:An interview with Seymur Tari- Turkven, TurkeyQ. Which stakeholder communities are most important to your organisation? ST: In the business we’re in we have to be very single-minded. So our portfolio companies come first. But as a consequence of managing those businesses for growth, I believe we have played an important social role in creating employment. I personally believe that employment is the biggest contribution that we can provide to the country. In building thriving workplaces we create enormous social benefit. Nevertheless, to achieve those social goals, one always has to focus always on the health of the portfolio companies. In a growth environment like Turkey, building value in a company is synonymous with job creation. At any given time, you have to recruit an excess of employees in anticipation Seymur Tari of next year’s growth. We are blessed with an economic environment in which our Turkven, Turkey social contribution is in complete harmony with our business goals. So it’s a really, really nice phase we’re in. Our colleagues in the West are very jealous because ours is a nice environment to operate in.1 Based on Private Equity International’s 2011 ranking of the top 300 private equity firms by size, ranked on the amount of private equity direct-investment capital each firm has raised over a five-year period (www.peimedia.com/Pages.aspx?pageID=3155). Resilience: Winning with risk I  25 
    • Bouncing back: Two Japanese corporations’road to resilienceBy David Jansen and William MacmillanRecent years have severely tested the resilience of Japanese companies David Jansen is an experienced PwC partner who provides strategic advice to corporations,and the country as a whole. Japan has experienced severe catastrophes governments and heads of state on issues includingincluding earthquakes, typhoons and the Fukushima nuclear plant globalisation, governance, mergers and acquisitions,meltdown. These natural and man-made disasters have occurred in and transformation. David recently authored the report, Revitalising Corporate Japan:a country that is also grappling with a struggling economy and a A Prescription For Growth, and is a frequentshrinking workforce. In this article, we look at how two Japanese lecturer on the issues facing Japanese corporationscompanies – Hitachi and Lawson, a convenience store group – have in their quest for global, profitable growth.developed the resilience needed to cope with both dramatic events He currently divides his time between Tokyo and New York.and gradual, but inevitable, long-term changes that threaten theirexistence. Their experience shows that a resilient organisation William Macmillan is a senior associate and a member of PwC’s global Japan Business Networkembraces bold leadership, is open to fresh and diverse perspectives, and was a contributor to the recently releasedmonitors mega-trends and is flexible. They also underline the report, Revitalising Corporate Japan:importance of helping people to believe change is needed, A Prescription for Growth. A graduate of the Wharton School of the University ofunleashing innovation, building agility, fostering the right Pennsylvania, William splits his time betweenalliances and creating the appropriate culture. New York and Tokyo. Specialising in post- disaster reconstruction he is currently helping develop innovative strategies in a variety of reconstruction initiatives in the Tohoku region.The risk resilience of Japanese shocks to the system are pretty obvious, Losing ground tocompanies has been repeatedly gradual change is much more difficult gradual disruption to see happening – and equallyput to the test in recent years. As in most developed economies, important to prepare for.The common view sees risk resilience Japan has been grappling with slow, Dealing with gradual and sudden or nonexistent, economic growth, ain terms of how a company can disruption requires a strategically changing workforce and the mutatingrespond to discrete ‘shocks’: natural risk-resilient mindset. This is a mindset shape of their key industries, amongdisasters, cyber-attacks, fraud and that embraces strategic risk-taking,regulatory actions, for example. other disruptions. And Japanese and readies the organisation to recoverEven strategic risk is normally viewed companies seem to be struggling to from, or even capitalise on, suddenthrough this event-driven lens. find a new path in a changing world. or gradual change.Is the company equipped to deal with So a highly resilient company will be This once thriving economy has builtsudden strategic challenges such as ready to respond to gradual disruptions global brands, managed complex salesa disruptive new market entrant, or with a series of smaller and gradual and distribution channels, pioneereda production or demand shortfall? changes. In contrast, failure to adopt a ground-breaking innovations andBut resilience is not just about discrete strategically resilient mindset in time established premier positions inevents. It is also a question of how can lead to a point where gradual industries such as chemicals,well companies weather more gradual disruptions must ultimately be aerospace, automotive, electronicsdisruption to their business. And while resolved with dramatic changes. and infrastructure.26 I  Resilience: Winning with risk 
    • Today however, many formerly leading corollary has been a departure from While the business lines were diverse,companies are losing ground to new time-honoured practices, the the business leadership was not.rivals in foreign markets at the same relinquishing of many traditional ties They started right at the top – with thetime as the domestic market continues and the need for difficult trade-offs board. As a result, Hitachi now hasa two-decade long slide. Gradual between competing priorities. seven external board members on itsdisruptions are grinding down these 13-member board. Another rarity foronce great giants. Healing Hitachi Japanese corporations, the board also In many ways, Hitachi exemplified a has three non-Japanese members:Time for change? traditional Japanese approach to George Buckley, former CEO of business. As one of the largest and 3M, Phillip Yeo, the chairman ofIn a recent interview with PwC, Singapore’s government developmentAtsushi Saito, CEO of the Tokyo Stock most prestigious Japanese companies, Hitachi’s wide-ranging business units agency and Sir Stephen Gommersall,Exchange Group (TSE) and former former British ambassador to JapanPresident of the Industrial Revitalisation stretched from consulting and business services to aeroplanes and nuclear and current CEO of Hitachi Europe.Corporation of Japan, described the reactors. But this sprawling empiresituation like this: “Even though many Forging a global perspective became increasingly unmanageableJapanese companies still boast very over time. In 2009, Hitachi posted the The imperative to be global has filteredstrong marketing power, production largest loss ever by a manufacturing out from the board all the way throughpower, or engineering power, they company in Japan, 787.3 billion JPY or the organisation. In another example,are losing their global position. $8.03 billion at 2009 exchange rates. Nakanishi has put in place a systemJapan’s first-class companies are now to benchmark Hitachi business unitsreviewing their strategies and feeling The response was a new broom that against their international peers asthe necessity for radical change, but saw Takashi Kawamura named as well as their local rivals, such asthe question is how quickly and how chairman, and in 2010, Hiroaki Toshiba and Mitsubishi. This forceseffectively can they do this. Everybody Nakanishi taking over as CEO. managers to focus on global trends ascan imagine change and talk about Together they began substantial reform. one way of escaping the ‘Galapagoschange, but the point is to what syndrome’, which stems from excessivedegree can they really change?” Broadening the board focus on the domestic market.There is a growing consensus through- The new leadership recognised that Armed with this broader perspective,out corporate Japan that it needs to an organisation competing in a global managers are better able to assess‘transform’ itself in response to the marketplace needed to embrace more the potential for new competitorslast 20 years of gradual disruption. diversity within. As seasoned emerging from a new geography, likeTransformation or ‘radical change’ executives at one of Japan’s most Indonesia or South Korea. This isas the TSE’s CEO put it, is dramatic. prestigious companies, they had the resilience in practice – generating political capital to insist on a more knowledge to be better prepared toBut this is the bitter pill that has to global approach to management. respond to changing circumstances.be swallowed for those Japanesecompanies wanting to position them-selves for faster recovery from future Figure 1 Hitachi stock performance relative to selected peerschallenges and changes. The timefor small and gradual changes is over. Index FY 2010=100Although most business leaders would 160rather avoid the drastic, the good news H 140is that if dramatic change is well-executed and sustained, it is also a 120route to resilience. That has certainly 100been the story of two of Japan’s leading N 80companies, which have made bold, Mand sometimes challenging, moves 60 Tto restore their competitiveness and 40strategic resilience. The challenging 26/03/201030/07/201003/12/2010 15/04/2011 26/08/201130/12/2011 11/05/201214/09/2012 02/04/201006/08/201010/12/2010 22/04/2011 02/09/201106/01/2012 18/05/201221/09/2012 09/04/201013/08/201017/12/2010 29/04/2011 09/09/201113/01/2012 25/05/201228/09/2012 16/04/201020/08/201024/12/2010 06/05/2011 16/09/201120/01/2012 01/06/201205/10/2012 23/04/201027/08/2010 07/01/2011 20/05/2011 30/09/201103/02/2012 15/06/201219/10/2012 30/04/201003/09/2010 14/01/2011 27/05/2011 07/10/201110/02/2012 22/06/201226/10/2012 07/05/201010/09/2010 21/01/2011 03/06/2011 14/10/201117/02/2012 29/06/201202/11/2012 14/05/201017/09/2010 28/01/2011 10/06/2011 21/10/201124/02/2012 06/07/201209/11/2012 21/05/201024/09/2010 04/02/2011 17/06/2011 28/10/201102/03/2012 13/07/201216/11/2012 FY10 23/07/201026/11/2010 08/04/2011 19/08/2011 27/01/2012 08/06/201212/10/2012 28/05/201001/10/2010 11/02/2011 24/06/2011 04/11/201109/03/2012 20/07/201223/11/2012 04/06/201008/10/2010 18/02/2011 01/07/2011 11/11/201116/03/2012 27/07/2012 11/06/201015/10/2010 25/02/2011 08/07/2011 18/11/201123/03/2012 03/08/2012 18/06/201022/10/2010 04/03/2011 15/07/2011 25/11/201130/03/2012 10/08/2012 25/06/201029/10/2010FY11 13/05/2011 23/09/2011 FY1227/04/201231/08/2012 02/07/201005/11/2010 18/03/2011 29/07/2011 09/12/201113/04/201217/08/2012 09/07/201012/11/2010 25/03/2011 05/08/2011 16/12/201120/04/201224/08/2012 16/07/201019/11/2010 01/04/2011 12/08/2011 23/12/2011 04/05/201207/09/2012 31/12/2010 11/03/2011 22/07/2011 02/12/201106/04/2012 30/11/2012 H Hitachi N Nikkei 225 T Toshiba M Mitsubishi Electric Source: Nikkei and Thomson Reuters, November 2012 Resilience: Winning with risk I  27 
    • Aligning the organisation with Figure 2 Hitachi return on equity compared to selected peersmarket demands %At Hitachi there are clear signs of a 20 Hnew spirit of boldness – fuelling M 10readiness to take the difficult steps T 0needed to bring the business closer tothe market. In November 2012, Hitachi -10finally closed down its television -20manufacturing business, a move -30other troubled Japanese consumer -40electronics companies have been -50unwilling or unable to make. -60 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12In a recent story in The Economist, H Hitachi T Toshiba M Mitsubishi ElectricNakanishi gave another anecdote.He described persuading the company Source: Nikkei and Thomson Reuters, November 2012management to invest the $800 milliondollars necessary to turn the hard-diskdrive unit business around. Rather Reinvigorating Lawson Creating a convincingthan resting on this accomplishment, Lawson is a major convenience store case for changeNakanishi subsequently sold the operator in Japan. In preparing for its When he arrived, Niinami describedbusiness this year for almost $5 billion. IPO in July 2000, Lawson was opening encountering deep scepticism from more than 1000 stores a year in the the Lawson employees. He pickedThis defines the spirit of boldness that already crowded Japanese up the challenge by visiting Lawsonis helping to transform Hitachi into marketplace. In the year after its convenience stores all over Japan.a more resilient and successful flotation, the company’s share price fell In an interview with PwC he describedorganisation. Hitachi leadership is by nearly forty percent. There was a how face-to-face interaction washaving the courage to break with the clear need for drastic measures. necessary to increase motivation:past and the financial rewards are During this period of turmoil, Lawson “I wanted to convey my passion andclearly measurable. Since Nakanishi brought in Takeshi Niinami from emotion, whatever it is, because I wastook the helm in 2010, the firm has Mistubishi Corporation, a major unknown to them, and becauseadded more than 16% to its market shareholder, to turn the company I was a trading house guy [not a retailcap, compared with a decline of 15% around. Appointed CEO in May 2002, guy]. But I wanted to share my visionin the broader Nikkei 225 Index.1 he was charged with reversing the with them, and strong passion should company’s decline, and restoring be conveyed directly.” investor confidence. Figure 3 Lawson stock performance compared to selected peers FY 2002=100 180 170 160 L 150 140 130 F 120 110 100 90 80 N 70 S 60 50 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 L Lawson N Nikkei 225 F FamilyMart S Seven & I Holdings Source: Nikkei and Thomson Reuters, November 20121 Since Nakanishi took the helm in 2010, the firm has added more than 16% to its market cap, compared with a decline of 15% in the broader Nikkei 225 Index. 28 I  Resilience: Winning with risk 
    • Fostering the right alliances Figure 4 Lawson return on equity compared to selected peersThis credibility was exceptionally %important in achieving one of 14Niinami’s most important short-termgoals. In order to establish the right 12 Lbusiness alliances that the company 10needed for its future operations, 8 FNiinami knew he would have to uproot S 6long established interests leftover 4from the previous management. 2But this was no easy task. In many 0Japanese companies strong FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12links between shareholders and L Lawson S Seven & I Holdings F FamilyMartmanagement, including widespreadcross-shareholding complemented by Source: Nikkei and Thomson Reuters, November 2012lending relationships and supplyarrangements, provide an informal approach he instituted like this: A more diverse workforce stimulatessafety net for many Japanese “I delegated decision-making authority more diverse ideas – necessary forcompanies. This has in turn created to the general managers of our regional resilient organisations to rapidly reacta corporate culture that places headquarters for day-to-day management. to change. Lawson fully embraced thegreat emphasis on preserving long- By empowering people, I could raise challenge of diversity, by naming twoestablished relationships, be they with their motivation and increased their women to its board and requiringlenders, former partners, or suppliers. productivity. This was completely that 50% of all new hires are women.This corporate philosophy has one different from the usual practice of These are pioneering moves in a nationclear advantage, management can be the Japanese retail industry.” ranked 101st of 135 in gender equality,confident that their lenders and according to the World Economic Forum.suppliers are tied into their long-term Creating the appropriate culturesurvival. In practice, however, this Unleashing innovation In a move that would bring painfuloften decreases the speed with which short-term consequences to some, This fresh thinking released a wave ofdecisions are made and promotes Niinami put an end to the ‘job for life’ innovation within Lawson, breedingan extremely headquarters-centric employment philosophy common to the strategic resilience necessary tomanagement of the company. many Japanese businesses, which survive these tough economic times. offers security and guaranteed One example is the recently launchedBuilding agility and flexibility promotion in return for loyalty. ‘Natural Lawson’ product line of freshAt Lawson, the headquarters-centric He recognised the need for full and organic foods targeted towards astyle stifled innovation at the store meritocracy in promotions to create a population increasingly focused onlevel. But a resilient organisation culture that fosters fresh thinking and sustainability. Another new businessensures that the best ideas can be enhances motivation. The company’s idea is the launching of pharmaciesimplemented no matter where they headcount shrunk by 20% in one year. aimed at Japan’s rapidly ageingare born. So a radical transformation But these changes didn’t end with the population.of the organisational structure was rank and file employee. Niinami tookneeded to give local units the autonomy the risk of reducing the size of theto respond to changing circumstances. board from 21 members to just 9,Niinami describes the new management removing 18 insiders. Resilience: Winning with risk I  29 
    • Trade-offs and pay-offs 1. Breaking with the past 3. Broadening horizonsThere was nothing easy in what The level of risk the Hitachi and At Hitachi, managers wereHitachi and Lawson achieved. Lawson leadership were willing instructed to benchmark againstThey have taken strategic risks that to take, and the sacrifices the international competition as thenone of their predecessors were companies had to make to company reoriented itself towardswilling to attempt. Leadership at both improve the company’s financial providing infrastructure solutionsfirms has also accepted that it may performance were greater than around the world. It’s a tactic thatsometimes be necessary to go against once would have been thinkable will prepare it to pre-empt and rivalthe loyalty to employees and close in corporate Japan. At Hitachi, a new set of competitors. Lawsonrelationships between management Nakanishi took the bold step of has identified an ageing populationand shareholders so central to the closing the once iconic TV business in Japan and a society more focusedJapanese ‘path’. This does not imply as part of a broader shift away on sustainability as demographicthat moving away from these cultural from consumer goods. Niinami trends that open up marketunderpinnings is always necessary.But it does underline the importance of Lawson was willing to break opportunities.of embracing fresh ideas and new with the entrenched interests of large shareholders and form In monitoring new competitiontools. It also demonstrates that the new alliances. or identifying new markets,steps needed to build resilience both illustrate risk resiliency.and success in today’s environment 2. Open to new ideas By analysing what’s going on ‘outmay be unpopular and difficult there’, they have improved theirfor many. A substantial restructuring of ability to assess risk and turnHere, we have set out some of the board was a feature of both it to their advantage. turnarounds. The fresh globalthe fresh thinking and potential perspectives on Hitachi’s board 4. Strengthening flexibilitycompromises that will form part are anchoring a pivot towardsof the road to resilience. international markets and At Lawson in particular, the company competitors. And as Lawson recognised the need to decentralise embraced full meritocracy in its decision-making in a move that employment practices, it was able ran counter to Japan’s headquarters to enlist the entire knowledge of -centric approach. While the the organisation to innovate in line trade-off would have been a release with the changing market. of control and perhaps increased inconsistency in decision-making, While the long-term pay-off is the upside is a flexible and nimble greater ability to adapt to changes organisation. At Lawson it also - a hallmark of resilient companies released innovation and gave - the trade-off would not have been rise to motivation. small. Both Hitachi and Lawson leaders will have had to weigh Local units are empowered by, and those benefits against the risk of better able than, their headquarters compromising Japanese cultural to respond to changes with speed norms where loyalty to company and agility. employees is long-heralded, as The measures taken by the two well as creating uncertainty and companies by no means comprise dissatisfaction for employees an extensive list of reasons why who assumed career security. Japanese companies are struggling. Atsushi Saito of the TSE evocatively However, they provide a practical describes this change as “destroying understanding of some key the triangle” – dismantling the and ultimately successful steps age-based and hierarchical system that each company took to be of talent management. In practice, more resilient. this means identifying and promoting talent that does not come from the traditional sources for Japanese companies.30 I  Resilience: Winning with risk 
    • Egypt: Weathering the stormBy Rehab AbdelhafezThe bloom is coming off the rose in post-Arab Spring Egypt as Rehab Abdelhafez is a senior manager with 14 years’ experience in market assessment andeconomic conditions deteriorate and political tensions rise between strategy services across various industries.the ruling Islamist party and the country’s educated middle class. Rehab was involved in strategy formulationWhat are the implications for companies operating in Egypt? and business planning projects for private andTo answer this question, we interviewed four local companies and public sector clients in Egypt and the Middle East region. She has also worked with developmentthree foreign-owned multinational corporations (MNCs) about what and donor organisations on key strategicrisks they face, how these risks affect the way they manage their assignments including the World Bank and theoperations and what is expected to improve or get worse over the UN, as well as other international NGOs. Rehab has advised clients on other strategic issues suchmedium- to long-term. The results provide valuable insights, as organisation structure and design, humanhighlighting the greater vulnerability of smaller local companies resource function improvement, recruitment,compared to multinationals, given their different exposures corporate citizenship and access to finance.and inherent structural differences.Egypt is undergoing a major change of The political transition has generated To gauge the business impact of thismood from the initial euphoria spurred some desired outcomes, with an changing economic and politicalby the revolution of January 2011. The elected president taking office environment and the risks it isinitial stirrings of a ‘lost generation’ in mid-2012. However, political creating, we spoke with three MNCsof disaffected and mostly educated, uncertainty remains high and operating in the business-to-consumermiddle-class youth provided the the development of many of the domain (automotive, personal carecatalyst for a public uprising that institutions needed to stabilise the and soft drinks), and four localquickly brought in people from across country has been held up by legal family-owned companies operatingdifferent walks of life, united by their challenges. The unity of the uprising in the business-to-business areadismay with the government and its has given way to a widening rift (facility management, printing,preferential policies. But, two years between Islamists – who landed a construction and automotiveafter the highs of the revolution, the majority in parliamentary elections tires trading).initial optimism is now tempered and won the presidential race –by challenging developments. and the more liberal and socialistThe country now faces escalating movements. Change has not come asgovernment debt, depleted foreign fast as people hoped and discontentexchange reserves and decreasing is spreading among ever more groupsinwards investment (see Figure 1). of the population. In this volatile environment, it is difficult to anticipate how events will unfold and the implications thereof. Resilience: Winning with risk I  31 
    • Figure 1 Egypt - key economic indicators 2007a 2008 a 2009 a 2010 a 2011a 2012 f 2013 f Population 76.9 78.3 79.7 81.1 82.5d 84.1 85.6 GDP Nominal GDP (US$ bn) 132.2 164.8 187.3 214.4 231.1 256.3 256.5 Real GDP growth (%) 7.1 7.2 4.7 5.1 1.8 1.9 3.5 GDP per head (US$ at PPP) 5,265 5,666 5,889 6,154d 6,286d 6,402 6,634 Expenditure On GDP (% Real Change) Private consumption 8.8 5.7 5.7 4.1 5.0 6.0 5.6 Government consumption 0.2 2.1 5.6 4.5 3.8 3.0 4.3 Gross fixed investment 23.7 14.8 -10.2 7.7 -5.6 -0.9 4.0 Foreign Exchange Exchange rate E£:US$ (av) 5.63 5.43 5.55 5.63 5.94 6.05 6.82 Exchange rate E£:€ (av) 7.72 7.99 7.73 7.47 8.26 7.70 8.61 Total International Reserves (US$ mn) 31,374 33,849 33,933 35,792 17,659 15,265 16,186 Source: Economist Intelligence Unit-Egypt Country Report (October 2012) a: actual, f: EIU forecastThe interviewees were asked Figure 2 Sector contribution to the economyfour questions1:1. What are the new risks that you $m have to deal with now, compared 16,000 to before the 25 January 2011 14,000 revolution? 12,0002. How are these risks affecting the 10,000 way you manage the business? 8,0003. In your view, what aspects of the 6,000 business environment will improve, 4,000 and what aspects will deteriorate 2,000 in the medium- to long-term? 04. What are the medium-term Industry Tourism Agriculture Services Finance Construction Telecommunication and information technology expectations for your business in Egypt?Despite the limitations of the smallsample size, the responses provide July 2004 - June 2010useful insights about the business January 1970 - June 2004perspective on the evolving macro-context in Egypt. These can be used Source: Ministry of Investment Annual Report, 2010to draw some important lessons.1 I would like to thank all the interviewed senior executives and owners/managers for their quick response and cooperation in providing their invaluable input for this analysis.32 I  Resilience: Winning with risk 
    • Two sides of growth Figure 3 Net foreign direct investments flowBefore we look at the results, it is $museful to compare the relativedevelopment and fortunes of the 14,000two sides of the economy. 12,000 10,000Growth in the Egyptian economy 8,000during the period 2004–2010 reachedas high as 6–7%, with strong impetus 6,000coming from foreign investment 4,000(see Figures 3 and 4). The increasing 2,000opening up of the economy in 0the wake of the 1990s structural 04/05 05/06 06/07 07/08 08/09 09/10adjustment programme attracted Establishments of new companies and increase in issued capitalmany more MNCs to start operations Proceeds put companies and productive assets to non-residentsin the country. Oil sector investments Real Estate investments Source: Ministry of Investment Annual Report, 2010 Figure 4 Source Country Contributions in the Flow of Issued Capital % 100 80 60 40 20 0 04/05 05/06 06/07 07/08 08/09 09/10 Egyptian Arab Foreign Source: Ministry of Investment Annual Report, 2010 Resilience: Winning with risk I  33 
    • However, the more sizable portion of Figure 5 Proportion of private sector investment to GDPinvestment and economic activity iscarried out by domestic family-owned %businesses and local enterprises, which 16 15%range in size from small to large, with 13.1% 14few achieving international status in 11.4% 11.6% 10.9% 12recent years (Figure 5 provides an 9.2% 10overview of the movements in private 8sector investment as a proportion 6of GDP). 4These small domestic businesses have 2contributed significantly to economic 0 04/05 05/06 06/07 07/08 08/09 09/10growth despite red tape, lack of financeand inconsistent legal protection, as Source: Ministry of Investment Annual Report, 2010well as seeing many of the bestopportunities still going to firmsfavoured by the previous regime.2Many of the firms – but some larger increasing aspirations and desire forones as well – are managing their global exposure. The cost of labour,operations ‘informally’ in a lot of capital and land is relatively cheap,respects. They lack the formal and the government has offered multipleorganisational structure and systems incentives in the form of tax breaks,of their corporate counterparts. Their privatised companies at attractivetax and accounting returns may fall values and provided a relativelyshort of compliance and hence their straightforward legal environment.contribution may therefore not be fully Combined with the political stability ofcaptured in official economic data. the country, it was an appealing choice for many, despite ranking rather lowMNCs can choose where in the world on measures such as ease of doingthey operate, moving into a new business or corruption.4market when the advantages outweighthe risks associated with doing Family businesses follow a differentbusiness in that locality. In recent trajectory, reflecting the ‘the uniqueyears, Egypt’s appeal to MNCs has bundle of resources created by theincreased as a result of certain interaction of family and business’.5measures. It is the largest market by These include human capital, socialpopulation within the Middle East and capital, patient financial capital,North Africa region, and its youth survivability capital and reputationrepresent half of its population,3 with capital.6 Family business success further depends on the elements of governance, structure and cost, and how these are deployed to manage the unique resources to create wealth for the organisations and the families.2 ‘From Privilege to Competition: Unlocking Private-led Growth in the Middle East and North Africa’, the World Bank, 2009.3 About 25% of population are in the 18–29 years age group. Source: Egypt Human Development Report 2010, UNDP.4 Egypt ranked 118 out of 176 in Transparency International Corruption Perceptions Index in 2012, and ranked 110 out of 181 in the World Bank’s Ease of Doing Business Index in 2011.5 Sirmon, D. & Hitt, M. ‘Managing Resources: Linking Unique Resources, Management, and Wealth Creation in Family Firms’, Entrepreneurship: Theory & Practice, Vol. 27, No. 4, pp. 339–358.6 Sieger, P., Zellweger, T., Nason, R.S. and Clinton, E. (2011). ‘Portfolio Entrepreneurship in Family Firms: A Resource-Based Perspective’, Strategic Entrepreneurship Journal, Vol.5, No. 4, pp. 307–326.34 I  Resilience: Winning with risk 
    • Family businesses face emerging, local or regional, as the However, the future is expected to benew risks market continues to attract new brighter. All those interviewed agreed investors. A third indicated that that once the current ‘transitional’The family managers and owners they are being undercut by illegally stage is over, things would be betterinterviewed felt changes in the smuggled goods, which are increasingly and the prospects for their businessbusiness environment generated risks entering the country, due to loosening are strong. They all felt positive aboutand issues they had not experienced border controls. the future, and shared hopes ofin the past, despite some being in things eventually moving in the rightoperation for many decades. In addition to these risk areas, the direction. All were particularly keen ‘Black Swan of Cairo’ 7 has had its for a more level playing field, improvedThe number one risk cited was implications on their businesses at regulations and better quality educationuncertainty about where the country a strategic level. Service companies that will provide better skilled humanis heading. This had spurred many to have seen their clients reduce their resources, hence cutting down onput investment and expansion plans expenditures, which is squeezing their the need to ‘start from scratch’ whenon hold, though some are now forging profit margins, disrupting their cash training staff.ahead, despite the risks. cycle or pushing them to competeThe lack of clarity about economic with a different set of players. MNCs push through For example, a company offeringpolicy, currency devaluation and MNCs interviewed saw the situation facility management and energyinterest rates is the second most differently. Despite everything, they services suddenly found their strategicimportant concern, directly affecting saw no fundamental change in the competitive advantage wiped awaytheir cost of operation, size of demand business environment and attendant after the revolution. They went toand expectations about wage rises. risks. They are aware of some labour market with the proposition ofThe current discussion of subsidy unrest and security concerns, but this innovative, integrated solutions. Theirremoval is raising concern about has not spurred them to scale back clients are seeing this as a luxury now,increased inflation, and accordingly investment. and new clients are less willing to try.demands for higher pay. In addition, The company now has to sell services The issue of greatest concern was thethe depreciation of the Egyptian poundis raising the cost of imported material separately in order to win new business. perception of ‘government paralysis’,for some companies, although for This has, in effect, taken them making government officials wary ofothers this might increase their ability ‘down the pyramid’ to compete with taking a stance on major decisions orto compete internationally. a completely different group of service even following through on decisions providers offering individual services already in place. This is manifestingLabour issues are the third important such as security and cleaning. itself in areas such as prolongedtopic of concern for family-owned product approval.companies. Workers are now able to Other companies have seen theexpress their demands more freely, demand for their business shrink, or One company indicated that there isbut the capacity to meet their stop altogether. Government business now increasing focus on Egypt fromdemands for higher pay is curtailed is on hold with no new opportunities headquarters, though the size of theirby the squeeze on business. proffered until certain political issues business is small in global terms. are in place such as a valid The bad publicity in the press requiresThe fourth recurring theme was the constitution and a functioning them to extend more effort in convincingchange in the level and nature of parliament. The private sector has the executives in HQ that the businesscompetition. One indicated that the recently started to resume activity, in is resilient and the prospects are as‘big players’ who prevailed during the the construction sector for example, good as before, if not even better.past decades have started to decline and work is starting to pick up. Somedue to the loss of their privileged of these companies have closed shop Interviewed MNCs shared the optimismposition with the fallen regime. for now, or are opting for regional of local companies. They too stronglyOthers are seeing new competitors business opportunities instead. believed the market has significant growth potential and are proceeding with their plans including expansion and injecting more investment in the country.7 Taleb, N. and Blyth, M. ‘The Black Swan of Cairo’, Foreign Affairs, May-June 2011, Vol. 90, No. 3, p. 33-39 Resilience: Winning with risk I  35 
    • Local family Multinational business Perceived emerging Several None risks Impact on business Medium to high impact Minor nuance management Expectations of longer-term Positive Very positive prospects Source: PwC analysisPositive outlook As a result, they are seeing several new Based on this, it may be possible to risks and challenges in the current draw a few lessons for companies toDespite popular concerns and the economic and political instability. be resilient in unstable conditions.gloomy image portrayed in local and Size and geographic diversificationinternational media, business remains Another factor behind the different support global companies inresilient and confident. It is particularly perspectives can be the customer base. minimising the impact of black swaninteresting to note that the buoyant The interviewed MNCs happened to be events. For local companies, customeroutlook cuts across local family firms serving consumers from mostly higher diversification will spread the risk ofand MNCs alike. income groups.These had been least business stagnation among the various affected by the economic and politicalMNCs can in some ways be more segments. Additionally, having a clear turmoil in Egypt. Local companiesresilient as they can offset risks in one competitive advantage that is not serve other businesses, of various sizes,market with opportunities in others. easily wiped by external shocks is which are facing a squeeze in demand.Indeed, some see the situation in another lesson. As the example of Those working with governmentEgypt as an opportunity. For example, the facilities management company had been most affected due to thesecurity concerns are increasing highlights, the challenge for others government’s inability to takedemand for certain products such decisions on new projects in light of is how to remain relevant whenas four-wheel-drive vehicles. The the political instability. This indicates demand comes under pressure.government is also seeking new that possible diversification of thesources of investment and is likely to Lastly, it is important for companies, customer base is a key factor of successdo more to support business, even if local and multinational, to focus on especially for smaller local companies.the policy paralysis may hold up some the longer-term prospects of theirdevelopments. All the MNCs we spoke A third factor behind the differing markets and plan accordingly.with said they would continue with perspectives is the companies’ strategic While turbulent conditions maytheir planned investments at this time management maturity. MNCs are used affect the company’s performanceso as to be best positioned for the to operating in highly competitive and in the short-term, they also presentmarket when it rides up again, which fast moving business environments. opportunities for better longer-termthey all expect it will. Many of Egypt’s local companies are results when stability is achieved. more familiar with the relatively Wiser firms with better clarity onThe prospects for local businesses are unchanging and less than competitive their longer-term business strategymore challenging and this is reflected environment that prevailed are more able to take investmentin their investment plans. They are historically. As competition increases decisions during high-risk situations,generally smaller in size, at earlier including illegal sources of goods, whereby they achieve a better marketstages on the maturity curve, and are the challenge is how to develop the position when the market becomesfamily-owned where the personal necessary efficiency and agility to more appealing to competitors inwealth of the owners is directly vie with the new entrants. quieter times.affected by the state of their business.They were used to a very stableenvironment and are mostlydependent on a limited customerbase and the commitment oftheir workers.36 I  Resilience: Winning with risk 
    • Picking up after Sandy:Resilience in the eyeof the storm By Neil KaufmanHurricane Sandy has forced business and community Neil Kaufman director and the US financial services lead for Business Continuity Managementleaders to question the effectiveness of their disaster (BCM). He has over 21 years of managementpreparation and planning. What can Sandy teach us consulting, operational and crisis communicationsabout developing a comprehensive and practical risk experience. Neil’s responsibilities include the creation of standards and training materials, asresilience programme? well as managing and participating in planning engagements. He has developed and implemented programmes for various clients during times of severe crisis. Neil is a frequent speaker at educational seminars like RIMS and the AICPA. He has published articles on business continuity planning solutions and concepts, and their real world applications. Neil received a B.A. in liberal arts from Clark University and an MBA in finance from DePaul University. He is a Certified Business Continuity Professional (CBCP).Where were you when Of course, my thoughts weren’t Could anyone really haveHurricane Sandy hit? immediately on my work at that time, been prepared for this? but I knew many of my clients wouldI know that’s going to become one also have been affected by the hurricane. Hurricane Sandy affected 24 states inof those questions that people ask My job is to help businesses ensure the US. It swept up the entire easternwhen they hear I live in Manhattan. they can keep their key operations seaboard from Florida to MaineThe answer is that I was right there. running in the event of an accident, a and west across the AppalachianAs the storm approached, with its eye disaster such as Hurricane Sandy, an Mountains to Michigan and Wisconsin.looking straight at us, I was wondering emergency or threats. Never more There was severe damage in Newhow to prepare, how much to prepare, pertinent, this is known as business Jersey and New York. The people ofhow much would my family, friends continuity management (BCM). New York City experienced floodingand neighbours be affected? BCM is a key component of risk in streets, tunnels and subway lines resiliency as it can fortify a company’s and lost power in and around majorAnd then afterwards, assessing parts of the metropolis. A construction long-term ability to withstand externalthe impact, working together with crane atop a $1.5 billion luxury threats. Some businesses were morethose friends and neighbours to do high-rise in midtown Manhattan prepared than others.everything we could for anybody who collapsed in high winds and dangledneeded it. We wondered how quickly From weathering Sandy live with precariously. This promptedwe would be able to get back on my family to getting back into the precautionary evacuations andour feet again. And with so much corporate field and helping clients many of the surrounding streets weredevastation, what would things recover afterwards, there had to be cleared. There were power outagesfeel like when we did? something to learn. This article shares and soon after, gasoline shortages. some of my reflections on what this storm taught us about disaster resilience. Resilience: Winning with risk I  37 
    • For some, these resource constraints Get real about the reality before you Silence was not golden. The ability tolingered for weeks and many really have to. Even with a plan, communicate in multiple ways (landbusinesses and communities continued disaster recovery won’t go completely lines, cell phones, satellite phones,to struggle. From a very personal as planned. Once the hurricane was social media) was essential to stayingperspective, some of my friends lost over, the unexpected continued to connected. Having multiple suppliershomes, clothing, cherished possessions happen, slowing recovery significantly for service was critical to avoiding aand a lifetime of collected memories in some cases. This is what businesses busy signal or a dropped network.in family photos – forever gone. I saw learnt from the harsh realities they Many businesses wrongly calculatedamazing efforts of neighbours helping encountered: that staff would be able to accesseach other. My office mate shared a their work applications with remoteportable generator with his neighbours You are on your own. Don’t expect computer connectivity for emailto make a community dinner and then assistance from agencies and local and workflow.took turns waiting in lines for gasoline. authorities. Outside assistance wasn’tI was proud to see my own son working able to address many companies’ All hands can’t be on deck. Just likein a kitchen at an evacuation shelter recovery needs. Those that fared better me, most people were not available tofor displaced victims of the storm had prepared for loss of life support focus on recovery since many werein lower Manhattan. systems (e.g. having generators that dealing with personal losses and were tested and not located on ground damage. Organisations had to dealGoing concern or long gone? floors scheduled diesel fuel deliveries with the loss of, or inaccessibility to, for those generators). Organisations key personnel while also supportingWhile many businesses may have that had reviewed their needs in the needs of their families. Betterhad plans in place for the hurricane advance were better placed. prepared organisations had robustresponse, the quality of those substitutes identified for key recoveryplans tended to vary widely. Those Plan the work, and work the plan. functions.companies that did not have BCM More often than not training andprocedures in place as part of their education had not been carried out Know your suppliers. Key suppliersoverall approach to risk management, throughout the entire organisation. did not have continuity plans to ensurelearned some painful lessons. In the Only people involved in continuity the resiliency of their services.aftermath, Hurricane Sandy had many planning understood the programme Key suppliers were not thoroughlybusiness leaders questioning just and the overall plan. Training and integrated into the recovery strategyhow robust their preparations were. exercising both senior management of many organisations. SupplierHow comprehensive were their BCM and line management is critical. management pre- and post-eventprogrammes? Will future storms have became a point of widespreadan even greater impact on preparedness Don’t live in a silo. IT recovery discussion.and long-term resiliency? Would a capabilities were not well-aligned withgood plan be the difference between the business recovery requirements. Read the fine print. Insurance didgoing concern and long gone? Loss of critical infrastructure and not cover all the losses from business telecommunications had not been interruption and property damage.If we look at the experience of Sandy considered and universally planned Service level agreements from vendorsand the nature of the response, for. This hampered business recovery. which read ‘best efforts’ were asome common pitfalls and practical Recovery strategies and remote wake-up call for many. What’s more,priorities emerge: locations had not examined various the fine print often referenced ‘force disaster scenarios that could include a majeure’ exceptions to the vendor geographic event. Many organisations’ taking responsibility for these ‘acts of recovery priorities were neither god’. Reviewing coverage and policy broadly known nor kept up to date. limitations is part of staying prepared. The result was slower responses and Those companies that had planned misaligned strategies. Organisations for key supplier outages were able that had pre-vetted those priorities to implement supplier redundancy and strategies were able to get back programmes and enact contingency on their feet faster. plans sooner.38 I  Resilience: Winning with risk 
    • It’s a race against time, Safeguarding your businessso save time in advance is possibleIn a crisis, time is a valuable and You can’t plan for every possiblescarce resource. In a crisis people scenario. You can’t mitigate everycan achieve great things. But don’t impact on your business from everyoverestimate the ability of employees disruption or disaster. However,to quickly and effectively put in the planning for some basic scenarios canmassive effort necessary to keep the buffer your organisation when thecompany operational – without a unexpected happens. Well-thought-documented and tested plan. through and regularly evaluated and updated BCM and IT disaster recoveryHaving a predefined strategy for plans can help your business to reducebusiness continuity significantly potential financial losses, reputationalreduces response time as many and legal liability. Their aim is tokey crisis management decisions increase recovery speed and enablewill already have been made a more orderly recovery. Developand validated. these plans with the insight from your broader risk management programmeIf it happened again, and your organisation will be in ahow ready are you really? better position to reduce those risks of greatest concern to leadership.A CEO’s perspective on resilience:An interview with John Koustas- Danaos Corporation, GreeceQ. What changes are you making to enable your organisation to adapt quickly and effectively to change? JK: Our business is closely correlated with consumer demand, which, in Europe, is presently down. Europe-Far East trade has declined, as has Europe-US trade. But worldwide the trade is still relatively healthy. Yes– East–West trade is central to worldwide trade. But in other parts of the world, trade is growing – across South America, for example. Still, that does not compensate for a drop in European demand. At this time, our company has completed its expansion of new facilities. For the time being, we are on hold and deleveraging. This is the key statement describing our present John Koustas business strategy. In this environment, most companies just want to be on safe ground Danaos Corporation, Greece and stay in preservation mode, rather than go for expansion. To be honest, it’s better to be in a cash-rich position. We are simply in an environment where it is very difficult to identify the risks we might face. Financing is important - but it’s the first time we’ve see the banking system in such a mess. How can you expand an economy without bank debt? It’s just not possible. Rather than imposing things in a forceful way, we need to give the process of deleveraging more time. Resilience: Winning with risk I  39 
    • Being ready for the unexpected in a new risk paradigm Want to ensure your organisation is as prepared as possible? Here are six ways to improve disaster resilience. 1. Make resilience part of the corporate DNA – Integrate risk management across the organisation and allocate senior management time to it. Combine traditional risk management (financial, operational, compliance-type risks) with individual risks such as BCM. Risk identification and assessment is not an episodic event, but a continuous process. 2. Revisit planning assumptions – Continuity plans need to consider new scenarios whose probabilities appear to have increased. In light of this, are the overall risk-planning assumptions still valid? Consider the areas of people, technology, communications, infrastructure, transportation and geography. 3. Perform and/or update threat analyses – Expand the existing plan to include the new scenarios and threats from recent events. Identify the correlated risk in your physical footprint and your technology, and mitigate the risk. 4. Develop/review/rehearse your crisis management and incident management procedures – These provide strategic command and control mechanisms that enable swift strategic and tactical response to more complex crisis events. Create a cross-functional, senior level crisis management team. Make the plan part of your organisational culture with defined roles and responsibilities and rigorous training. 5. Focus on supplier dependencies – If your risk assessment determines that a regional interruption is a prudent planning scenario, then your local suppliers and/or the transportation systems they rely on to provide their services to you will be impacted. Assess the criticality of your suppliers, secure multiple sources for critical processes and assess your suppliers’ preparedness to deal with disasters. 6. Annually assess your programme – Companies should begin by assessing their current BCM programme against the new ISO Standard;1 identify areas of necessary remediation; and prepare for formal ISO Certification.1 The International Organization for Standardization (ISO) has officially launched its first international business continuity management (BCM) standard titled: ISO 22301, ‘Societal Security – Business Continuity Management Systems – Requirements.’ For more information go to www.iso.org40 I  Resilience: Winning with risk 
    • Resilience practices: One-year follow-upanalysis on Global Risks 2012 casesBuilding resilience against highly uncertain and unpredictableexternal risks can complement traditional risk management,especially in today’s interdependent and interconnected world.As noted in the Special Report in the Resilience must be achieved in balance on what resilience practices might beWorld Economic Forum’s Global Risks with other objectives, such as efficiency – relevant in each case. The examples2013 report, a working definition of for example, investing in operational are drawn from practices that haveresilience for a country (or an organisation) redundancy may enhance resilience already proved their efficacy asis its capability to adapt to changing but constrain short-term efficiency. well as practices that are currentlycontexts, withstand shocks and recover To further the debate on the importance being tried and, though unproven,to a desired equilibrium while preserving of resilience and the best ways to build seem promising.the continuity of its operations. it, the World Economic Forum hasResilience implies the capacity for both collaborated with PwC to develop aspeedy recovery after a shock (such one-year follow-up analysis of theas a market crash or natural disaster) three risk cases presented in the Globaland timely adaptation in response to Risks 2012 report: The Seeds of Dystopia,a changing environment (such as a demo- How Safe Are Our Safeguards?, and reports.weforum.org/global-risks-2013/graphic transition or climate change). The Dark Side of Connectivity, focusing www.weforum.org/reports/global-risks-2012-seventh-edition Project leads Dennis Chesley Chiemi Hayashi Christopher Katarina Hruba Ed Simmons Partner and Global Director Michaelson Project Associate Consultant Risk Leader PwC World Economic Director World Economic PwC Forum PwC Forum The Seeds of Dystopia Marissa O. Michel Mena Cammett Mary Cline Courtney Rickert Alexandra Rogan Director Associate Director McCaffrey Associate PwC PwC Eurasia Group Analyst Eurasia Group Eurasia Group How Safe Are Our Safeguards? Bruce Oliver Bill Helming Anthony Ho Director Managing Director Manager PwC PwC PwC The Dark Side of Connectivity Dave Burg Martin Caddick Neal Pollard Partner Director Director PwC PwC PwCThis article can also be found in the online version of the World Economic Forum’s Global Risks 2013 report http://reports.weforum.org/global-risks-2013/view/section-seven-online-only-contentresilience-practices-one-year-follow-up-analysis-of-global-risks-2012-cases/Sidebars accompanying the case analyses on the following pages were authored by PwC staff to further explore resilience in action. Resilience: Winning with risk I  41 
    • Case No. 1:The Seeds of DystopiaDescription of the case Resilience practicesMismanagement of population ageing These practices for understanding,and sustained high levels of youth measuring and ultimately improvingunemployment remain pressing resilience are drawn from research ofchallenges across developed and numerous case studies from aroundemerging markets. ‘Seeds of Dystopia’ the world. While most relate directlycase highlighted the potential for fiscal to governments as the primary enablerand demographic trends to prompt the of the social contract and, therefore,emergence of a new class of fragile societal and economic stability, thestates with widespread social cases also reflect the critical roleinstability and discontent. stakeholders from across society will necessarily play.The case asserts that dystopia willensue if the social contract is no longer Resilience practice 1: Seekbelieved in by wide segments of holistic insights and involvethe population. As youth see a lackof opportunities and the aged are a range of stakeholdersconcerned about smaller or nonexistent Any approach to building resiliencebenefits after a lifetime of work, social must draw upon holistic insightspressures increase. These phenomena related to ageing, youth unemployment, Image: Bruce Oliverare closely linked to each other as inequality, fiscal imbalances and thewell as to political and policy reform, social contract.1 Collaboration amongproductivity, education, and other the private sector, civil society, local young entrepreneurs and offer greatermacro-trends. To address them, and national governments, and opportunities to earn income andinnovative and sustainable solutions multilateral organisations in creating educate children. Social resilienceare needed. a modern and sustainable social could be enhanced through such efforts, contract is crucial. which create create educational and employment opportunities, addressing For example, SELCO is a social the growing resentment about enterprise in India that makes solar inequality between rural and urban panels and lights. 2 Through multi- areas in India. stakeholder partnerships with international institutions and rural Because it is based on a holistic state-owned banks, SELCO provides understanding of the socioeconomic loans to rural Indian households and context, this multi-stakeholder institutions such as schools to purchase collaboration allows for competing solar lighting systems, which enables interests to be appropriately represented them to obtain energy and internet and managed, minimising the risk connectivity. These in turn provide an that solutions will prove unfavourable improved working environment for to any group of stakeholders.1 Concepts and Dilemmas of State Building in Fragile Situations – From Fragility to Resilience, 2008, New York: Organization for Economic Co-operation and Development, http://www.oecd.org/dac/conflictandfragility/41100930.pdf2 Case Study SELCO: Solar Lighting for the Poor, 2011, New York: United Nations Development Programme, http://www.growinginclusivemarkets.org/media/cases/India_SELCO_2011.pdf42 I  Resilience: Winning with risk 
    • Resilience practice 2: This example illustrates that Over the course of 2011, full-timeMonitor trends and revisit continuous monitoring of trends and employment increased by 190,000 revisiting assumptions allows for jobs while the unemployment rateassumptions routine evaluation of what truly fell slightly from 7.6% to 7.5%7 –Monitoring and analysis – including enhances resilience over the short-, outperforming the OECD average offorecasting and scenario planning – of mid- and long-term. It also enables 8.2%.8 Based on data from the Galluptrends in ageing, technology, labour stakeholders to challenge assumptions World Poll, the OECD calculates anand youth engagement enables that may no longer be valid. index of its members’ communitystakeholders to regularly reassess tolerance of minority groups andassumptions and risks and correct Resilience practice 3: migrants. Canada topped this index.9strategies as needed.3 These processes Promote inclusive and openimprove responsiveness of policies and The Canadian example illustrates that attitudes toward immigrantsstrategies to changing environments the efficacy of immigration policiesand to potential crises. Countries with flexible immigration is influenced by social norms, as more policies often have more resilient tolerant and accepting societiesThe UN Millennium Development labour markets, as migrants are more make it easier for migrants to beGoals demonstrate the use of highly able to fill the gaps left by retiring economically active and civicallysuccessful adaptive strategies based on workers. The strong growth of the engaged. These norms also fostercontinuous monitoring and analysis. Canadian economy in recent years greater social resilience.The economists who manage the (particularly in the natural resourcesUN Millennium Development Goals sector in the western provinces),constantly gather data to enable them coupled with the increasing retirementto identify best practices and negative rate of its ageing workforce has led to atrends which need to be rectified. shortage of skilled workers in theFor example, UNICEF and UNESCO country. The government has takenInstitute of Statistics established a advantage of its society’s openness toglobal initiative to gather data and immigrants through the Federalanalyses about out-of-school children. Skilled Workers Program, which inThe initiative, which involves 26 2011 admitted more than 57,000countries from seven regions, aims to skilled immigrants to Canada.6develop “context-appropriate policies These immigrants helped meet theand strategies for increasing enrolment Canadian economy’s growingand attendance of excluded and demand for labour.marginalized children.” 4, 5 Moredata-driven, targeted educationpolicies could improve countries’prospects of achieving the millenniumdevelopment goal of universal primaryeducation. Such initiatives areessential to fostering socioeconomicresilience because education boostscitizen engagement and the skilllevel of the labour force.3 Wilkinson, L, ‘How to Build Scenarios’, Wired Magazine, http://www.wired.com/wired/scenarios/build.html, 20094 Reaching out-of-school children is crucial for development, June, 2012, UNESCO Institute of Statistics, http://www.uis.unesco.org/FactSheets/Documents/fs-18-OOSC-2.pdf5 ‘Global Initiative on Out-of-School Children’, UNESCO Institute of Statistics, http://www.uis.unesco.org/Education/Pages/out-of-school-children.aspx, 20126 ‘Citizenship and Immigration Canada, Fact Sheet – Federal Skilled Worker Program’, Government of Canada, http://www.cic.gc.ca/english/resources/publications/employers/federal-skilled- worker-program.asp, 20127 Labour Force Survey: 2011 year-end review, 2011, Ottawa: Statistics Canada. http://www.statcan.gc.ca/pub/75-001-x/2012002/article/11639-eng.pdf8 ‘Employment and policies data’, Organisation for Economic Co-operation and Development, Directorate for Employment, Labour and Social Affairs, 2011, http://www.oecd.org/els/ employmentpoliciesanddata/howdoesyourcountrycompare-canada.htm9 Society at a Glance in 2011: OECD Social Indicators, 2011, Berlin: Organization for Economic Co-operation and Development, http://www.oecd.org/berlin/47570353.pdf Resilience: Winning with risk I  43 
    • Resilience practice 4: For example, the US Government has The investor diversity enabled byDiversify risk through committed US$1 billion over five years initiatives such as the InvestMichigan! to the Small Business Association Mezzanine Fund can provide fundinginnovative financing (SBA) Impact Investment Initiative,10 stability during crises. Additionally,Innovative financing can increase which will provide capital to invest impact investing typically provides forresilience by providing additional with the private sector in companies outcome-dependent returns, so it isresources from alternative sources in underserved and vulnerable in investors’ interest to ensure thatsuch as the private sector and communities.11 The first SBA initiative projects are successfully designed toindividual donors, to foster vital was the InvestMichigan! Mezzanine meet social needs and are sustainableprojects and initiatives despite Fund, launched in 2011 in partnership and efficient. Overall, such successfuleconomic shocks which may reduce with the State of Michigan Retirement programmes can strengthen aor redirect limited state resources. Systems and Dow Chemical Company, country’s socioeconomic resilience.Impact investing, an example of an which contributed US$35 millioninnovative financing tool, marries and US$15 million, respectively.12 (This Seeds of Dystopia One-Yearstate funding with private investment. The InvestMichigan! Mezzanine Fund Follow-Up analysis has been producedThese initiatives to diversify sources aims to provide stable funding, which in collaboration with PwC andof financial support allow governments has historically been hard to find for Eurasia Group.)to leverage private capital to meet job-creating start-up and early-stagesocial needs and ensure continuity companies in Michigan. Stabilityof services by diversifying sources comes from a diversity of fundingof finance. sources, combining the private sector funding and Michigan’s pension fund. The fund targets high-growth enterprises that can accelerate job creation,13 which is vital as Michigan’s economy suffers from a relatively high unemployment rate of 9.1%.14 In partnering with the private sector, impact investing also seeks to leverage efficient management, provide social benefits and promote knowledge sharing. The Invest Michgan! Mezzanine Fund, for instance, connects local private-sector leaders with businesses that benefit from the fund’s investments to enable individuals to share knowledge.1510 ‘Impact Investment Initiative’, U.S. Small Businesses Administration, http://www.sba.gov/content/impact-investment-initiative, 201111 ‘Start-Up America Impact Investment SBIC Initiative’, U.S. Small Businesses Administration, http://www.sba.gov/sites/default/files/files/Impact_Investment_Policy_Memo_April_2011.pdf, 201112 ‘SBA Licenses First Impact Investment Fund in Michigan’, U.S. Small Businesses Administration, http://www.sba.gov/content/sba-licenses-first-impact-investment-fund-michigan, 201113 Ibid14 ‘State Unemployment Continues to Fall in October 2012’, National Conference of State Legislatures, http://www.ncsl.org/issues-research/labor/state-unemployment-update.aspx , 201215 ‘Invest Michigan!’. State of Michigan, Officer of the Governor, http://www.michigan.gov/documents/gov/Invest_Michigan_223205_7.pdf, 200844 I  Resilience: Winning with risk 
    • Resilience in action: Tracking trends to challenge assumptionsand steer the right courseBy Mena Cammett and Marissa O. MichelGiven today’s dynamic global environment, the contours of country’s population growth relatively low.19 However, inour most pressing strategic challenges are constantly changing. the intervening 30 years, the policy, combined with a culturalOur approaches to tackling these problems must also be preference for boys, has created a severe gender imbalanceflexible and responsive to circumstances, as solutions that – the 2010 census revealed that there are at least 20 millionwere once a perfect fit for the problem at hand lose their more men than women, presenting a social and domesticrelevance, and once-effective approaches become stale. security challenge. State officials are focusing closely on how to improve employment opportunities for young men,Monitoring and analysis, to include forecasting and a move that in part stems from concerns over potentialscenario planning, enable governments, corporations and delinquency and social unrest, while also attempting toothers to regularly reassess assumptions and risks, change manage a significant elder dependency problem.course as needed and develop new opportunities forsustained growth.16 The ability to anticipate and adjust The government maintains that the policy will largelyto future scenarios is a key facet of resilience. Routinely remain in place for at least the next ten years, despite itevaluating strategic and policy initiatives enhances becoming clear in the mid-1990s that gender imbalancesresilience over the near-, mid- and long-term by allowing and an ageing population had the potential to impact thestakeholders to challenge assumptions that may have been labour markets and employment rates across the country ascorrect at a point in time, but become invalid over time. soon as 2015.20 While the potential for overpopulation willAdditionally, regular analysis allows for the identification of remain a concern for a country of China’s size, underlyingrisks and opportunities. Stakeholders can use data and assumptions about the long-term demographic health ofinformation gathered through monitoring to develop likely China and the ongoing viability of the one child policy mayscenarios to forecast how key risks and strategic challenges have shifted, and a reassessment of the policy may be inwill play out in the medium- to long-term.17 Continuous order to enhance China’s long-term societal resilience.monitoring and analysis of trends can be applied acrosssectors to provide a check on the appropriateness, sustainability, Indications are that the government is engaging in somerelevance and costs of different approaches to tackling level of review, as evidenced by the publication of a reportstrategic challenges. Organisations that do this well can by a government-backed think tank urging a re-examinationweather the challenges ahead, while those that fail to revisit of the policy to reverse China’s ‘ageing crisis’.21 Re-evaluationtheir own approaches and assumptions may be left behind. of the policy has begun to show itself in the regulatory sphere as well; in some cases the government has been graduallyRighting demographic imbalances easing regulations, including allowing couples comprised of two only-children to have more than one child. This is toDemographic imbalances, particularly rapidly ageing alleviate what is known as the “4-2-1” issue, or the possibilitypopulations with low replacement birth rates, provide a that an only child will shoulder the burden of care for twoperfect example of global strategic challenges that are parents and four grandparents. Some experts who havebest addressed by the consistent monitoring and analysed this issue advocate implementing a uniformevaluation of trends. two-child rule as a means of easing enforcement andAnalysis of China’s population initiatives highlights the rebalancing the population. Continued analysis and inputimportance of continuous monitoring and evaluation in from academic circles may be swaying those in a position tocrafting policy interventions to address demographic make policy changes; in 2011, an official in the Chineseimbalances. Facing overpopulation that had the potential to government’s National Committee of Population, Resourcesoutstrip national food supplies and cause environmental and Environment indicated that officials were studyingstresses in the 1950s, the Chinese government instituted proposals for a two-child policy, and predicted that urbana series of practices over 20 years aimed at introducing couples with a female child might be permitted to have athe concept of family planning to curb birth rates.18 second child as early as 2015.22 The continuous transformationThe government researched and tested policies, practices of China’s one-child policy reflects the importance ofand campaigns across urban and rural areas, culminating continuous monitoring and evaluation, and the government’sin the family planning policy now known as ‘one child’. continued ability to revise its sweeping policy initiatives taking into account feedback and trend analysis from otherWhile estimates vary considerably, the Chinese government stakeholders will be vital to maintaining social resilienceclaims to have prevented 400 million births and kept the moving forward.16 Lawrence Wilkinson. ‘How to Build Scenarios’, Wired Magazine, 2009. Accessed on the web at http://www.wired.com/wired/scenarios/build.html17 Global Facility for Disaster Reduction and Recovery, ‘Open Data for Resilience Initiative’, 2012, Accessed on the web at https://www.gfdrr.org/gfdrr/opendri18 George Dvorsky, ‘The Unintended Consequences of China’s One Child Policy’, IO9, 2012, accessed on the web at http://io9.com/5948528/the-unintended-consequences-of-chinas-one+child-policy19 Yardley, Jim, ‘China Sticking with One Child Policy’, New York Times, 11 March 2008, accessed on the web at http://www.nytimes.com/2008/03/11/world/asia/11china.html?_r=020 Eurasia Group, ‘The Politics and Business of Demographic Change’, Eurasia Group Global Trends Quarterly, First Quarter 201221 Associated Press, ‘Chinese Government Think Tank Urges End to One-Child Policy’, CBS News, Oct 31, 2012, accessed on the web at http://www.cbsnews.com/8301-202_162-57543253/ chinese-government-think-tank-urges-end-to-one-child-policy/22 Tania Branigan, ‘China Considers Relaxing One-Child Policy’, The Guardian, March 8, 2011, accessed on the web at http://www.guardian.co.uk/world/2011/mar/08/china-relaxing-one-child-policy Resilience: Winning with risk I  45 
    • Case No. 2:How Safe Are Our Safeguards?Description of the case Resilience practice 1:Societal safeguards need to be reinvented Question the validity ofon an ongoing basis, given the ever- assumptions underlyingchanging nature of global risks. safeguardsWith rapid global change, safeguardscan become imbalanced where they In an ever-changing world, it is likelydo not provide adequate protection, that key assumptions underlying aor otherwise stifle innovation. safeguard will ultimately become invalid, and responses to crises basedThe ‘How Safe Are Our Safeguards?’ on flawed assumptions will compromisecase explored whether current processes rapid recovery and adaptation.for developing societal safeguards can Therefore, processes must exist toeffectively build resilience against monitor and challenge the validity ofcross-border risks in a complex and the assumptions underlying safeguards.interdependent world marked byuncertainty, innovation and rapidly Financial system stabilitychanging conditions. The financial crisis of 2007–2009 demonstrated that the assumption thatResilience practices a ‘microprudential’ approach, one Image: Bruce OliverComparable practices that may foster focused on the health of individualresilience in the face of cross-border financial institutions, would safeguard Pandemic influenzarisks in a complex and interdependent financial stability was no longer valid.23world can be found in two very preparedness In response, regulators adopted adifferent areas: financial system ‘macroprudential’ approach, which Questioning the underlying assumptionsstability and the prevention of addresses the whole financial system, behind pandemic influenza vaccinepandemic influenza. Safeguards in and regulators enhanced their ability manufacturing is a continuing partboth areas have been challenged and to question the validity of assumptions of World Health Organization (WHO)continue to evolve in ways that are underlying this new approach. For strategies. For example, the 2009expected to foster more effective example, the United States established H1N1 pandemic led WHO to challengeresponses to future crises. the Financial Stability Oversight the assumption that large multinational Council (FSOC), which identifies “risks pharmaceutical companies could ramp that could arise outside the financial up production fast enough for all services marketplace.”24 The FSOC affected populations. The pandemic monitors risks to the stability of the US demonstrated that low-income nations financial system that may arise outside would be supplied only after the of the existing regulatory structure. wealthy nations had ensured adequate23 Yellen, J., ‘Pursuing Financial Stability at the Federal Reserve’, Federal Reserve Bank of Chicago, http://www.federalreserve.gov/newsevents/speech/yellen20111111a.pdf, 201124 ‘Subtitle A, Financial Stability Oversight Council – Section 112(a), Purposes and Duties of the Council’, Dodd–Frank Wall Street Reform and Consumer Protection Act, http://www.gpo.gov/fdsys/pkg/PLAW-111publ203/html/PLAW-111publ203.htm, 201146 I  Resilience: Winning with risk 
    • coverage for their own populations. Financial system stability Forward-looking safeguard elements,As a result of challenging the assumption, from stress-testing in finance to The financial crisis of 2007–2009 arosea new vaccine manufacturing schema projections in vaccine planning, help in part because traditional regulatorywas created to enable developing to identify areas of emerging risk in safeguards such as capital ratios didnations to establish domestic vaccine the respective systems, and enhance not capture evolving risks of systemicmanufacturing capabilities and resilience by enabling early response impacts.26 In response, regulatorsultimately to reduce their dependence to emerging risks. incorporated forward-lookingon wealthier nations.25 elements27 into their regulatory Resilience practice 3: LeverageThe output of the microprudential frameworks. For example, both the market and other incentivesapproach and the potential speed European Banking Authority28 and theof flu vaccine production are both US Federal Reserve conduct stress To foster resilience, safeguards shouldexamples of assumptions which tests using scenario methodologies29, strike a balance between protectingneeded to be questioned in order to to better understand the variety of society from risk, such as by enhancingmake financial and health systems possible future developments in order the ability to recover from crises, andmore resilient to future crises. to prevent future crises and mitigate enabling society to benefit from the impacts of crises, by enabling risk-taking. This can often best beResilience practice 2: Build early detection and intervention.30 achieved by using incentives whenforward-looking elements feasible rather than restricting or Pandemic influenzainto safeguards directing activities. preparednessFor a safeguard to strengthen resilience Safeguards against pandemic influenza Financial system stabilityin the face of a dynamic and evolving also employ forward-looking elements, The financial crisis of 2007–2009risk, regulators must look over the consistent with the dynamic nature of highlighted systemic risks posed byhorizon to be able to recognise the risk. Because new strains of the flu creditors’ assumptions that largeissues early and mobilise quickly virus evolve quickly, WHO’s Global financial institutions are ‘too big toto recover from crises. Influenza Surveillance Network31 fail’ and will always be rescued by meets twice each year to analyse government – given that government monitoring data and to project which rescues are an inefficient way of influenza strains are most likely to facilitating crisis recovery.33 To infect populations in 6–12 months. enhance market discipline on risk- Based on those projections, the taking, the US Federal Deposit Network recommends suitable strains Insurance Corporation now has the to be included in the influenza authority to liquidate large non-bank vaccines for each new flu season.32 financial institutions and impose losses on investors including shareholders and creditors. Larger banking institutions must submit plans for orderly liquidation 34, 35 and make enhanced public disclosures of risk information. 36, 37 These measures provide the information and incentives for investors to demand management action to shore up the stability of financial institutions.25 ‘Report of the second WHO Consultation on the Global Action Plan for Influenza Vaccines (GAP)’, World Health Organization, http://whqlibdoc.who.int/publications/2012/9789241564410_eng.pdf, 201126 Tarullo, D., ‘Developing Tools for Dynamic Capital Supervision’, Board of Governors of the United States Federal Reserve Board, http://www.federalreserve.gov/newsevents/speech/ tarullo20120410a.htm, 201227 Dutta, K., Babbel, D., ‘Scenario Analysis in the Measurement of Operational Risk Capital: A Change of Measure Approach’, 2010, http://fic.wharton.upenn.edu/fic/papers/10/10-10.pdf28 ‘EU-wide Stress Testing’, European Banking Authority, http://eba.europa.eu/EU-wide-stress-testing.aspx, 201129 ‘Section 165(i), Stress Tests’, Dodd–Frank Wall Street Reform and Consumer Protection Act, http://www.gpo.gov/fdsys/pkg/PLAW-111publ203/html/PLAW-111publ203.htm, 201130 ‘Section 166 - Early remediation requirements’, Dodd–Frank Wall Street Reform and Consumer Protection Act, http://www.gpo.gov/fdsys/pkg/PLAW-111publ203/html/PLAW-111publ203.htm, 201131 ‘WHO Global Influenza Surveillance Network (GISN) Surveillance and Vaccine Development’, WHO Collaborating Centre for Reference and Research on Influenza, http://www.influenzacentre. org/centre_GISN.htm, 201232 lbid33 Tarullo, D., ‘Regulating Systemic Risk’, Board of Governors of the United States Federal Reserve Board, http://www.federalreserve.gov/newsevents/speech/tarullo20110331a.pdf, 201134 ‘Section 165(d) Resolution Plan and Credit Exposure Reports’. Dodd–Frank Wall Street Reform and Consumer Protection Act, http://www.gpo.gov/fdsys/pkg/ PLAW-111publ203/html/PLAW-111publ203.htm, 201135 ‘Title II – Orderly Liquidation Authority’, Dodd–Frank Wall Street Reform and Consumer Protection Act, http://www.gpo.gov/fdsys/pkg/PLAW-111publ203/html/PLAW-111publ203.htm, 201136 ‘Section 165(f) – Enhanced Public Disclosures’, Dodd–Frank Wall Street Reform and Consumer Protection Act, http://www.gpo.gov/fdsys/pkg/PLAW-111publ203/html/PLAW-111publ203.htm, 201137 Tarullo, D., ‘Regulatory Reform since the Financial Crisis’, Board of Governors of the United States Federal Reserve Board, http://www.federalreserve.gov/newsevents/speech/tarullo20120502a.htm, 2012 Resilience: Winning with risk I  47 
    • Pandemic influenza Resilience practice 4: Pandemic influenzapreparedness Coordinate actions across preparednessSeparate funding from the US borders and organisations Influenza and other infectiousgovernment increased economic diseases are inherently cross-border Safeguards to protect global systemsincentives for the pharmaceutical firm challenges in today’s globalised world. are beyond the capability of any oneNovartis38 to make additional long- Accordingly, stakeholders leverage country to put into place; therefore,term investments in seasonal influenza WHO, which works closely with other governance structures must coordinatevaccine programmes. Without this multilateral organisations, government action across borders to identify,government support, the private sector agencies and key laboratories to coordinate prevent and respond to crises.alone lacks clear incentives to make and manage the surveillance of, andsuch long-term investments. This Financial system stability response to, global public health threats.funding initiative provided a cost- For example, leverage WHO plays aneffective means to ensure domestic Recognising the interconnectedness of integral role in coordinating activitiesvaccine production capacity in the global financial markets and institutions, under the Global Action Plan forevent of a pandemic flu outbreak, and G20 countries established the Influenza Vaccines, a comprehensiveit provided mutual benefits to both the Financial Stability Board (FSB) to strategy to promote the production ofUS Government and Novartis39. coordinate financial services regulators influenza vaccines.43 A coordinated and international standard-setting global response to a pandemic wouldIn both cases, action to adjust bodies.40 In November 2011, the FSB be difficult without this level ofincentives – by requiring information collaborated with financial regulators organisation.disclosure in finance and providing from numerous countries to developeconomic incentives to invest in Key Attributes of Effective Resolution Having cross-border organisationsvaccine production – increased the Regimes for Financial Institutions, such as the FSB and WHO in placeresilience of systems without the need which provides guidelines for recovery prior to the onset of a crisis can improvefor restricting or directing activities. and resolution planning for banks responses and enable stakeholders to and financial institutions41. As a result adapt more nimbly and effectively of that international coordination, to future cross-border crises. these leading practice guidelines are being implemented globally with the aim of better equipping the global financial system to respond to future disturbances.4238 ‘HHS creates new centers to develop, manufacture medical countermeasures’, U.S. Department of Health & Human Services, http://www.hhs.gov/news/press/2012pres/06/20120618a.html, 201239 Reengineering the Influenza Vaccine Production Enterprise to Meet the Challenges of Pandemic Influenza. August, 2010, Washington DC: Executive Office of the President, President’s Council of Advisors on Science and Technology, http://www.whitehouse.gov/sites/default/files/microsites/ostp/PCAST-Influenza-Vaccinology-Report.pdf40 ‘About the FSB; History’, Financial Stability Board, http://www.financialstabilityboard.org/about/history.htm, 201241 Key Attributes of Effective Resolution Regimes for Financial Institutions, October, 2011, Basel: Financial Stability Board, http://www.financialstabilityboard.org/publications/r_111104cc.pdf42 Progress of Financial Reforms, October, 2012, Basel: Financial Stability Board, http://www.financialstabilityboard.org/publications/r_121105.pdf43 ‘Global Action Plan for Influenza Vaccines (GAP)’, World Health Organization, http://www.who.int/influenza_vaccines_plan/en/, 201148 I  Resilience: Winning with risk 
    • Resilience in action:Taking advantage of windows of opportunityBy Bruce OliverShort-term objectives tend to get in the way of long-term Climate changeobjectives. Safeguards known to be outdated and ineffective Climate change is a clear example of an issue wherecan remain in place where change would be difficult, short-term objectives have impaired the ability to meetexpensive and/or unpopular. Those barriers can, however, long-term objectives. As Lord Stern, a leading climateweaken from time to time as crises or shifts in the balance scientist 44 said, “Although climate changes challenges areof power temporarily increase stakeholder appetite to bear clear, public policy is moving slowly. Its progress mustshort-term pain for long-term gain. The ability of an be unblocked.” 45organisation, country, or society to thrive in the face ofchange, therefore, may depend on its ability to identify and Unfortunately, climate change also illustrates that it may betake advantage of windows of opportunity to make the easier to recognise windows of opportunity only after theychanges necessary to meet long-term objectives. have begun to close. The period of 2006–2008 may have been such a window. During that period, the case forClearly, maintaining the status quo while waiting for a responding to climate change was made in many influentialwindow of opportunity is a terrible strategy for achieving ways: the government of the UK released the 2006 Sternlong-term objectives. Windows of opportunity seldom Review on the Economics of Climate Change;46 the Unitedopen wide enough or at the right time. And actions taken Nations Intergovernmental Panel on Climate Change issuedduring windows of opportunity tend to include unhelpful its Fourth Assessment Report;47 ‘An Inconvenient Truth’overreaction and opportunistic overreaching. On the other was awarded the Oscar for Best Documentary of 2007;hand, where necessary changes are otherwise impossible Al Gore and the Intergovernmental Panel on Climateto accomplish, waiting to pounce upon an imperfect but Change were co-awardees of the 2007 Nobel Peace Prize;available opportunity may be the only strategy – terrible and climate change was on the World Economic Forumsthough it may be. Organisations, countries and societies Annual Meeting agenda.48 While there was no universalcan ill afford to miss such openings. agreement about specific causes and solutions, public consciousness about climate change was high; the economic and political case for action was relatively strong; and many organisations were spurred to action. Yet no significant actions were taken. Since that time, the urgency of mitigating the pace and impacts of climate change has dropped precipitously, a decline highlighted in PwC’s annual CEO Surveys between 2008 and 2012.49 Currently, climate change is struggling for sufficient attention and resources. Moreover, there remains a strong push to question the underlying science of whether human activity has had any meaningful impact on climate. In retrospect, the period of 2006–2008 might have been a missed, imperfect but workable, opportunity for even more effective action on climate change.44 I.G. Patel, Professor of Economics and Government, India Observatory, London School of Economics, http://www.weforum.org/content/tackling-climate-change45 http://www.weforum.org/content/tackling-climate-change46 http://webarchive.nationalarchives.gov.uk/+/http:/www.hm-treasury.gov.uk/stern_review_report.htm47 http://www.ipcc-wg2.gov/publications/AR4/index.html48 ‘Water is today’s issue; it is the oil of this century’ Andrew N. Liveris, Chairman and Chief Executive Officer, Dow Chemical Company, USA. Prize laureate Al Gore and Irish musician Bono made this point as they underscored the connection between climate change and poverty.” http://www3.weforum.org/docs/WEF_AM08_Report.pdf, p. 15, 2008.29 The key findings of PwC’s 11th Annual Global CEO Survey, released early 2008, included the finding that: “CEOs want governments to play a more prominent role on the international stage ... in leading efforts to address climate change” and that “CEOs acknowledge that governments cannot, in isolation, tackle climate change – and that collaboration within the business community will be critical,” http://www.pwc.com/th/en/publications/11th-annual-global-ceo-survey.jhtml, p. 9, 2008. In contrast, the key findings of PwC’s 15th Annual Global CEO Survey, released early 2012, included no mention of the issue of climate change. http://www.pwc.com/gx/en/ceo-survey/pdf/15th-global-pwc-ceo-survey.pdf, 2012. Resilience: Winning with risk I  49 
    • Case No. 3:The Dark Side of ConnectivityDescription of the case Resilience practice 1: AssignThe Dark Side of Connectivity case top-level responsibility forexplored the online security risks cyber resilienceassociated with the criticalinfrastructure that underpins our Resilient cyber strategies should bedaily lives and depends increasingly developed at no lower than the boardon hyperconnected online systems. level within each organisation to enableThe case highlighted the need for effective identification of trends,public–private cooperation to secure adaptation to changing business contexts,a healthy cyberspace. efficient response to systemic shocks and continuity of business operations.Over two billion people worldwide50now have direct access to the internet. Many large banks have transferredConsumer devices, social media and responsibility for cybersecurity fromnetworked connections could drive IT divisions to group security, alongchange faster than businesses and with crisis management, and havegovernments can keep up. In addition, provided board-level oversight.criminal abusers of cyber networks Fortune 500 corporations havehave been quick to exploit the growing created chief information securityopportunities presented by society’s Image: Bruce Oliver officer positions, not only in their chiefreliance on these technologies, with information office, but in their generalever-growing sophistication. These trends highlight the importance counsel offices, reflecting the need of strategic perspectives and cross- for top-level accountability and the functional collaboration at the mostResilience practices consideration of a variety of key senior levels. Such collaborativeResilience in cyberspace means more corporate functions: contract review, decision-making can guide corporate-than preventing future cyber attacks: enterprise risk management, assurance wide investments and capabilitiesit means reducing recovery times and compliance, human resources – not just technology investments –following such attacks. The resilience and workforce management, and to anticipate and adapt to emergingof our cyberspace depends on strong regulatory reporting. These shifts trends, respond to shocks and decreaseleadership, capable of keeping up with reflect the degree to which cyber- recovery time. These strategies improvethe pace of change. This leadership security decisions involve much corporations’ abilities to respond tomust come from the top of government more than technology management crisis by marshalling enterprise-wideand business, not just technology – they also include risk and liability resources and strengthening collaborative,management. Improving resilience also management. cross-functional processes.requires investing in infrastructurethat builds and sustains trust amongsystems and users.50 ‘Internet Usage Statistics’, Internet World Stats, 2012, http://www.internetworldstats.com/stats.htm50 I  Resilience: Winning with risk 
    • Resilience practice 2: Share Resilience practice 3: Resilience practice 4: Design-cyber knowledge in trusted Coordinate among resilient electronic devicespublic-private forums governments during crises and online systemsTrusted knowledge sharing between Formalised bilateral procedures Encryption is a crucial element ofpublic and private stakeholders between governments, which could be resilient information sharing. Designimproves understanding of, and used in the event of a cyber crisis, are and use of properly encrypted devicesresponse to, cyber threats that can important to facilitating fast, decisive and online systems will improve theaffect critical infrastructure. action and limiting damage from resilience of information-sharing against cyber attacks. malicious attacks or simple human errorFor instance, the Australian when systems’ protection fails.government has established the In light of this recognition, the UKTrusted Information Sharing Network held formative talks with China and BlackBerry® devices, for example,(TISN),51 a network of government Russia in 2012 to establish cyber provide secure, encryptedrepresentatives, business stakeholders crisis communication channels.52 communication, and Apple’s latestand cyber experts, to address the risks The proposed communication channels products include similar securityof cyber threats to critical infrastructure could help identify the sources of technology. Half of businesses thatthat could severely damage Australia’s cyber attacks and limit misunder- have outsourced processes over theeconomy, social systems, or national standing that may lead to escalation. internet ensure that their data issecurity. It aims to use the network to Such channels are becoming ever more encrypted. Furthermore, Trustedincrease awareness of cyber risks to important with the increased ability Platform Modules (TPMs) providecritical infrastructure, share strategies of cyber attackers to use proxy servers both device encryption and deviceto reduce cyber risk, and provide a to mask their identities online as authentication, embedded in thefeedback mechanism to highlight ‘agents of the state’.53 hardware of the device. This assuresprivate sector cyber issues to the data protection as well as devicegovernment. It allows for resilience Similarly, South Korea has also entered authentication even when software-practices to be shared across the supply into bilateral cyber cooperation agree- based digital certificates arechain so that there is mutual benefit ments with other nations including compromised or forged. TPM chipsin avoiding the failure of a key link in China, Japan and the US. 54, 55, 56 are used by nearly all personalthe chain. The TISN enables critical These bilateral agreements include computer and notebook manu-infrastructure organisations to improve procedures that provide for formal facturers, yet relatively fewunderstanding of risks and provides a cyber crisis coordination, realistic corporations take advantage of theseplatform for responding quickly when bilateral cyber-attack testing and the chips to authenticate devices oncyber threats do materialise. ability to share technical information corporate networks throughout between government agencies in the the enterprise, for example.Due to the rapidly changing nature event of a cyber attack. Such elementsof cyber threats, governments and allow for advanced preparation and Tools such as encrypted communicationthe private sector need to have the ability to share crucial information and enterprise-wide TPM strengthenmechanisms to share knowledge in to identify attack sources and resilience by protecting data as ittrusted networks, so that critical coordinate responses quickly across moves across systems, irrespectiveorganisations have the latest national borders. of uneven system security. Such trustinformation to respond quickly infrastructure, crucial for information-and effectively to cyber attacks. Documented success stories of these sharing resilience, enables corporateSuch responsiveness to shocks is strategies are scarce, due in part to enterprises to adapt over successiveat the heart of cyber resilience. the confidentiality surrounding both generations to emerging consumer testing exercises and real cyber technology, which can change as attacks. Nonetheless, established rapidly as the next trend in smart formal communication channels phones. It also fosters resilience by between governments in a crisis ensuring a general level of reliability are crucial to enable quick and by minimising disruptions if one clear collaboration to avoid damage link in the chain fails. and prevent escalation through miscommunication.51 Critical Infrastructure Resilience Strategy (2010). Australian Government. http://www.tisn.gov.au/Documents/Australian+Government+s+Critical+Infrastructure+Resilience+Strategy.pdf.52 Hopkins, N. “Britain in talks on cybersecurity hotline with China and Russia”. The Guardian, http://www.guardian.co.uk/politics/2012/oct/04/britain-cybersecurity-hotline-china-russia, 2012.53 “Bilateral Discussions on Cooperation in Cybersecurity”. China Institute of Contemporary International Relations (CICIR) – Center for Strategic and International Studies (CSIS), http://www. cicir.ac.cn/chinese/newsView.aspx?nid=3878, 201254 lbid.55 Soyon, K. “S. Korea, US Discussing Combined Cyber Warfare Drills” KBS World Radio News, http://world.kbs.co.kr/english/news/news_Po_detail.htm?No=93141&id=Po, 2012.56 “South Korea, U.S. Hold Defense, Foreign Affairs Talks”. U S Department of Defense, http://www.defense.gov/News/NewsArticle.aspx?ID=116749, 2012. Resilience: Winning with risk I  51 
    • Resilience in action:New behaviours for a new worldBy Martin Caddick and Neal PollardCyber systems are already recognised as being as important Not only does cyberspace lack the natural and instinctiveas physical assets for our critical infrastructure. But they resilience of our physical society, but we have not had theare more than this. Cyberspace is a virtual extension to chance to design our systems to reduce risk in a wayour physical world which mirrors our cities by facilitating that takes human behaviours into account. In high-riskcommunication, trade, culture and social activity. It has occupations (health, air and nuclear industries, forbecome an integral part of how the developed world lives, example) systems are carefully designed, taking intoand with a low cost of entry, it could become even more account how people behave naturally to minimiseimportant in the developing world. But, unlike our physical the risk this poses.society, which has matured over many thousands of yearsinto a complex structure of behaviours, customs and rules, We need to learn new ways to behave and new wayscyberspace is new. It has not developed mature patterns of to cope with human behaviour to create a safebehaviour and customs. The speed of development has left a cyber world.generation gap where the average teenager has a betterunderstanding of cyberspace than most of our leaders.The implications of all this are not well-understood, andtried and tested approaches, based on generations ofexperience of the physical world, may or may not work.Potential risks are not matched by appropriate cautionand behaviour (for example, our willingness to shareinformation on Facebook or to manage what we sayon Twitter). Some disconnects between the physical and cyber worlds Physical Cyber Risks and likely consequences relatively visible, Working online in comparative safety gives a false sense of and can be kept in perspective security, and the risks and consequences are not realised. Illustrated by teenage hackers. Seventy percent of communication is non-verbal, and Without non-verbal communication, there are more this can be seen in the physical world, reducing misunderstandings and less empathy, leading to ill-judged misunderstanding. posts. Illustrated by celebrity use of Twitter. Cause and effect is constrained by physical limitations, Effect is often almost immediate due to speed of giving the opportunity to react to and mitigate communications, meaning you can face a crisis situation materialising risks. before you are even aware of the cause. Illustrated by the speed at which ill-judged communications go viral. Boundaries and association is primarily defined by People associate across the world in line with their interests geography and occupation, making regulation cutting across national boundaries. New loyalties are relatively straightforward. being established. Illustrated by people’s identification with Wiki leaks.52 I  Resilience: Winning with risk 
    • Resilience: Winning with risk I  53 
    • Resilience: Winning with riskPublishersDennis Chesley Miles Everson Juan PujadasGlobal Risk Consulting Leader US Advisory Financial Services Leader Vice Chairman, Global Advisory ServicesPwC US PwC US PricewaterhouseCoopers International LimitedExecutive EditorsRobert G. Eccles Christopher MichaelsonProfessor of Management Practice Director, Strategy and Risk Institute, PwC Global AdvisoryHarvard Business School Associate Professor, University of St. Thomas Opus College of BusinessManaging Editor Production EditorRania Adwan Shannon Schreibman+1 (646) 471 5116 +1 (646) 471 1102rania.adwan@us.pwc.com shannon.schreibman@us.pwc.comPwC US PwC USSpecial thanks to the following parties for their production and editorial assistance:John Ashworth, Chris Barbee, Sarah Breen, Lisa Cockette, Michael Golen, Ashley Hislop, Angela Lang, SarahMcQuaid, Roxana Opris, Malcolm Preston, Alastair Rimmer, Suzanne Snowden and Guatam VermaAuthorsRehab Abdelhafez Dan Hamza-Goodacre Erwann Michel-Kerjan+20 (0) 2 27597812 +44 (0) 20 7804 1133 +1 (215) 573 0515rehab.abdelhafez@eg.pwc.com dan.hamza-goodacre@uk.pwc.com erwannmk@wharton.upenn.eduPwC Egypt PwC UK Wharton risk management and decision processes center,Martin Caddick Lee Howell University of Pennsylvania -+44 (0) 20 7804 6547 +41 (0) 22 869 1212 Wharton Schoolmartin.caddick@uk.pw.com riskresponsenetwork@weforum.orgPwC UK World Economic Forum Shami Nissan +44 (0) 20 7213 1195Mena Cammett David Jansen shamiram.nissan@uk.pwc.com+1 (703) 918 1908 +1 (646) 471 8329 PwC UKmena.a.cammett@us.pwc.com david.jansen@us.pwc.comPwC US PwC US Marissa O. Michel +1 (703) 918 3948Carlos Castillo Neil Kaufman marissa.o.michel@us.pwc.com+1 (703) 918 3127 +1 (646) 471 7976 PwC UScarlos.j.castillo@us.pwc.com neil.kaufman@us.pwc.comPwC US PwC US Bruce Oliver +1 (703) 918 6990Lauren Cook Lit Ping Low bruce.oliver@us.pwc.com+1 (646) 471 5193 +44 (0) 20 7804 0345 PwC USlauren.cook@us.pwc.com lit.ping.low@uk.pwc.comPwC US PwC UK Oz Ozturk +41 (58) 792 9037Richard Gledhill William Macmillan oz.ozturk@ch.pwc.com+44 (0) 20 7804 5026 +1 (646) 471 5538 PwC Switzerlandrichard.gledhill@uk.pwc.com william.j.macmillan@us.pwc.comPwC UK PwC US Neal Pollard +1 (703) 918 3781 neal.a.pollard@us.pwc.com PwC USwww.pwc.comPwC helps organisations and individuals create the value they’re looking for. We’re a network of firms in 158 countries with more than 180,000 people who arecommitted to delivering quality in assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us at www.pwc.com.This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon theinformation contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracyor completeness of the information contained in this publication, and, to the extent permitted by law, PwC does not accept or assume any liability, responsibilityor duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for anydecision based on it.© 2013 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity.Please see www.pwc.com/structure for further details.The Design Group PwC UK 21384