Regulation and compliance are this year’s top business risk: EY

(As originally appeared in FEI Canada F.A.R. member e-newsletter, July 2010)

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Anne-Marie Hubert, Managing Partner, Advisory Services, Ernst & Young LLP

In today’s post-downturn economy, compliance and regulation concerns are emerging as the most important global business risks on the minds of executives this year. As Canadian companies adapt to the changing economic landscape, risk retains a high position on the agenda.

Global expansion has vastly increased the complexity of the business environment, multiplying a variety of risks in many industries, and opening the door to new and unforeseen competitors. Asset management, banking and insurance are experiencing political backlash and a regulatory overhaul. Oil and gas, real estate and mining and metals are contending with efforts by cash-strapped governments to gain revenues, while public sector organizations are coping with sudden political decisions.

Although the financial crisis has abated, a fiscal crisis has emerged in its place. A double-dip recession is a growing fear for many as there is no guarantee that global growth will continue if stimulus packages are withdrawn. Companies can mitigate the risk of such a recession by ensuring strong risk management, applying cost-cutting measures and investing in response planning for changing economic conditions. 

As a way to understand how companies are dealing with today’s risks, EY interviewed global industry executives for the annual Business Risk Report and determined the following risks for 2010:

  1. Regulation and compliance
  2. Access to credit
  3. Slow recovery or double-dip recession
  4. Managing talent
  5. Emerging markets
  6. Cost-cutting
  7. Non-traditional entrants
  8. Radical greening
  9. Social acceptance risk and corporate social responsibility
  10. Executing alliances and transactions

Compliance and regulation are a reoccurring concern for businesses across a majority of sectors. Executives in the wider financial sector worry that regulatory reform proposals have the potential to destroy customer and shareholder value. In addition, new taxes and higher capital requirements will impose a competitive disadvantage on attracting capital in the financial market.
Over the next 12 months, regulatory reforms are set to gain considerable momentum. This makes it imperative for Canadian businesses to assess the impact of new reforms on their business models, and develop a prioritized and integrated road map to address these changes. To help eliminate compliance and regulation threats, firms will need to rebuild trust and act in concert to convince governments, regulators and the public that their activities do not create undue risks.

Although access to credit has fallen from the top spot to second place on the list this year, this risk remains high for Canadian businesses as industries fear impending credit costs from rising levels of government debt.

While familiar threats are resurfacing in 2010, new risks are also appearing. Managing talent and emerging markets are high on the risk ladder this year. Executives surveyed acknowledged emerging markets as a threat greatly dominating global growth and overtaking developed markets. Now is an opportune time for companies to expand globally and acquire market share in emerging markets hit by the financial crisis. Canadian companies can also ease this risk of emerging markets by building relationships with regulators in advance of investing and attaining a balance between expat expense and local knowledge. 

Managing talent is high on the radar of companies searching and retaining global talent. Restructuring during the downturn was tough on human capital, a practice already strained by the aging population. One way to ease this risk is to build a workforce that attracts a diverse range of men and women who have different perspectives, educational and business experiences, speak different languages, and come from a variety of cultures and generations. With different ways of thinking around the table and in leadership positions, an organization has a better chance of innovating, and connecting with global clients.

New to the top ten business risks in 2010 is social acceptance and corporate social responsibility (CSR). These risks pose particular threats to the reputations of those in the asset management and banking industries, to transparency and accountability in government, to the social license to operate in sectors such as mining and metals and oil and gas, and the public acceptance of technologies such as nuclear generation in power and utilities. To alleviate these risks, companies need to account for public opinion in their business decisions and take careful action to inform the public through transparent activities and careful public relations management.

EY’s Business Risk Report 2010 reveals that Canadian and global organizations still face a variety of recurring and new threats across all sectors as the economy exits recession. Leading organizations are successfully handling these risks by taking the time to understand their business environment, the changes occurring in the industry and how their competitors are reacting to challenges and opportunities. This helps them proactively identify emerging risks and work on strategies to mitigate them.