Best practice risk principles apply to both strong positive markets and those trending towards downsides and recession. In good markets, these principles help a firm be opportunistic and enhance their business model. In deteriorating conditions, they protect, and even can save a firm, as well as allow the firm to leverage opportunities that might arise.
Material corrective action can only occur early, after the problem becomes general knowledge flexibility is lost and the ability to have a differentiated outcome will have vanished. But preventive action-taking only occurs in the very beginning of a problem before there is general recognition.
We recommend business leaders proactively consider the following activities to protect their organizations amid turbulent waters:
- Lock in longer-term liquidity now: reduce use of short-term funding. We envision there is a tangible risk to short-term liquidity availability at any price at certain points in time.
- Investigate/Implement schooling alternatives for staff, COVID disruptions are going to continue.
- Increase use of workforce productivity tools; survey staff to determine major roadblocks.
- Increase Investment in cybersecurity, cyber risks are increasing dramatically, and this trend will escalate.
- Reduce expenses judiciously, as expense pressure will continue. Do not succumb to the temptation to release expensive, experienced middle managers, as these subject matter experts, tempered by business cycle experience, will be critical to success – maybe even survival.
- Continue to review supply chain processes. The supply chain challenges may continue to be material. Assume that the likelihood of further deterioration in links with China is probable. Assume that countries may "ring fence" critical items from cash to capital to commodities.
- Review currency mismatches in global operations, with a focus on avoiding being short US dollars in case there is a continued global freeze. Running a “squared” position would be recommended.
- Stress test operations to identify operating and cashflow break-evens and what actions can be taken if (before) those break-evens are reached. Positive cashflow is the “existential” issue. Mistakes in other areas can be damaging to the firm’s share price and reputation – but can be survived.
- Ensure that your crisis manual is current and distributed in both electronic and paper-form. Indeed, our mid-year 2022 C-Suite Outlook suggests that in the wake of repeated global disruptions (e.g., pandemic, war) businesses are enhancing/updating their risk management and crisis management plans.
- Enhance your use and leverage of your staff having direct access and contact with clients and suppliers. The real time information that they provide can be a critical differentiator in terms of your ability to move in a timely manner to protect your firm. Third-party ratings and financial reports are often stale and dated by the time they are released. Face-to-face contact can provide early warning signals that can and will make all the difference. Your top people recognize how their clients and suppliers are doing.
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