When logic should trump emotion

Risk professionals are increasingly being asked by their boards to scan the horizon for emerging risks. But if 2016 has taught us anything, it’s that for many risks, sometimes you’d be better off peering into a crystal ball to see what the future might hold.

At the start of the year, not many could have predicted that Britain would vote to leave the European Union, that TV personality Donald Trump would become the world’s most powerful politician as America’s new president-elect, or that hundreds of government leaders across the world would be exposed in the unprecedented release of financial documents known as the Panama Papers.

Closer to home, the Philippines elected a new president in Rodrigo Duterte; the war for territory in the South China Sea continues; and China’s president Xi Jinping had his status elevated to the communist party’s ‘core’ leader – a powerful title handed out only three times before.

But looking at the most recent, and arguably the largest global event of the year to date – the US elections – many questions are being raised as to what this means for business and for foreign trade around the world.

Unlike Clinton, Trump did not comprehensively outline his domestic and foreign policies. As such, there is considerable uncertainty about which policies he will pursue in office and how aggressively he will do so. So, what does that mean for businesses in Asia-Pacific?

Many commentators believe the US will pull back from its ties to Asia as the administration pursues a more nationalistic, transactional foreign policy. That could see regional countries in Asia strengthen ties with China, reflecting both underlying geopolitical realities and uncertainty about US commitments. But, dare we forget, that many of those same commentators were the ones predicting a landslide win for the Democrats…

Safe to say, whichever direction the world’s biggest economy takes, 2016 has been a time of massive geopolitical upheaval and unrest, and businesses in Asia-Pacific will be affected – though to what extent is anyone’s guess.

Against this backdrop, it should be no surprise, then, that political risk entered the top 10 risks for the first time ever this year in the StrategicRISK Asia Risk Report. What’s interesting is that our survey of Asia-Pacific risk and insurance managers was taken between August and October – after Brexit, but before the US elections. One can only imagine where political risk, FX risk or regulatory risk would have fallen had the survey been taken after Trump’s victory had been announced.

To me, this highlights the importance of perception versus reality when it comes to assessing risks. Is the risk of terrorism, for example, more likely to affect your business today than 12 months ago, or has the ‘CNN effect’ taken hold and heightened senior leaders’ awareness or fear of an event taking place?

While no one can dispute that risk management is a balance of art and science, when risks are more emotive in nature, it is surely the science that should prevail when making strategic business decisions. And this is precisely where risk management can demonstrate its worth.

Risk managers’ true destiny surely lies in being embedded with strategy to help executives make decisions.

As one chief risk officer said to me this year: “Helping people consciously choose to take risks is good because it means that they’re doing it utterly informed.”

And in the uncertainty of the future, making risk-informed business decisions will become ever more important.

From the entire StrategicRISK team, I hope 2016 has been a great year for you. We look forward to seeing you again around the region next year.