risk management

From Reactive to Proactive: Transforming Your Approach to Risk Management and Legal Compliance

Kurt GraverBusiness Development

In the tumultuous sea of modern business, where the waves of change crash relentlessly against the hull of every company, risk management and legal compliance are the twin rudders that keep the ship on course. Without them, even the mightiest vessel can founder on the rocks of litigation, be dashed to pieces by the winds of regulatory action, or capsized by the weight of its unmanaged risks. Yet, all too often, businesses approach these critical functions reactively, treating them as mere afterthoughts or necessary evils rather than as the strategic imperatives they truly are.

As a seasoned consultant at SGI Consultants, I have seen firsthand the perils of this reactive approach. I have watched companies scramble to put out the fires of legal action, only to find themselves consumed by the inferno. I have seen them try to navigate the treacherous waters of regulatory compliance, only to run aground on the shoals of ignorance and neglect. I have witnessed the slow, inexorable toll that unmanaged risks can take on a company’s bottom line, reputation, and survival.

However, I have also seen the transformative power of a proactive approach to risk management and legal compliance. I have watched companies seize control of their destinies by anticipating and mitigating risks before they materialise, staying ahead of the curve of regulatory change, and turning compliance into a competitive advantage rather than a burden. And I have seen the rewards that await those who make this transformation: greater resilience, improved performance, and the confidence that comes from knowing that no matter how rough the seas may get, your ship is built to weather the storm.

This blog post will explore the key principles and practices of a proactive risk management and legal compliance approach. We will examine the pitfalls of the reactive mindset and the benefits of the proactive one. We will chart a course for transforming your approach, drawing on real-world examples and actionable insights to help you navigate the challenges and opportunities of the modern business landscape.

The Perils of the Reactive Mindset


The reactive mindset is all too common in business. It sees risk management and legal compliance as necessary evils rather than strategic imperatives, treats them as costs to be minimized rather than investments to be optimized, and approaches them as discrete, siloed functions rather than as integral parts of the company’s overall strategy and operations.

This mindset is understandable to a degree. After all, risk management and legal compliance can be complex, time-consuming, and expensive. They can feel like distractions from the “real work” of running the business or like burdens imposed by faceless bureaucrats and regulators. In the short term, cutting corners, taking shortcuts, or simply hoping for the best and dealing with problems as they arise can be tempting.

However, the long-term costs of this reactive approach can be severe. Consider the following statistics:

  • According to a 2021 study by the Federation of Small Businesses (FSB), the average cost of a legal dispute for a small business in the UK is £11,000, with one in five disputes costing over £30,000. [1]
  • A 2020 report by the Ponemon Institute found that the average cost of a data breach in the UK is £3.1 million, with the cost per lost or stolen record averaging £119. [2]
  • A 2019 Institute of Directors (IoD) survey found that nearly 60% of UK businesses had experienced a significant risk event in the past year, the most common being cyber attacks, data breaches, and regulatory issues. [3]

These figures paint a stark picture of the financial and reputational damage resulting from unmanaged risks and legal liabilities. And they are just the tip of the iceberg. The true costs of the reactive mindset can be much harder to quantify. Still, no less significant: the opportunities lost, the innovations stifled, the talent driven away, and the trust eroded by a culture of short-termism and corner-cutting.

Moreover, the reactive mindset is not sustainable in today’s fast-moving, hyper-connected, highly regulated business environment. With new risks and regulations emerging and stakeholders demanding ever-greater transparency and accountability, companies that fail to manage their risks and comply with their legal obligations proactively are setting themselves up for failure.

As the great wartime leader and risk manager extraordinaire Winston Churchill once said, “Let our advance worrying become advance thinking and planning.” [4] In other words, the key to thriving in uncertain times is not to react to events as they happen but to anticipate them, prepare for them, and shape them to your advantage. And that is precisely what a proactive approach to risk management and legal compliance is about.

The Benefits of the Proactive Mindset


In contrast to the reactive mindset, the proactive mindset sees risk management and legal compliance as strategic imperatives rather than necessary evils. It recognizes that these functions are not just about avoiding negative outcomes but about creating positive ones: driving innovation, building trust, and fueling long-term growth and success.

The benefits of this proactive approach are many and varied. Here are just a few:

Greater Resilience

Companies that proactively manage their risks are better positioned to weather the storms of change and uncertainty. By anticipating potential threats and developing contingency plans, they can minimize the impact of negative events and bounce back more quickly from setbacks. This resilience is especially important in today’s fast-moving and unpredictable business environment, where a single crisis can make or break a company’s fortunes.

Improved Performance
Proactive risk management and legal compliance can also drive better business performance. By identifying and mitigating risks early on, companies can avoid costly mistakes, delays, and disruptions that can sap productivity and profitability. They can also free up resources that would otherwise be tied up in reactive firefighting, allowing them to focus on more strategic priorities. By staying ahead of regulatory changes and industry standards, companies can gain a competitive edge and capture new opportunities.

Enhanced Reputation
In today’s transparent and socially conscious business environment, reputation is everything. Companies that proactively manage risks and comply with legal obligations are better positioned to build and maintain trust with their stakeholders: customers, investors, employees, regulators, and the wider public. This trust can translate into tangible benefits such as increased loyalty, higher valuations, and a more engaged and motivated workforce. Conversely, companies that take a reactive approach to risk management and compliance are more likely to suffer reputational damage that can be difficult or impossible to recover from.

Greater Agility
Proactive risk management and legal compliance can also make companies more agile and adaptable to change. Companies can stay ahead of the curve and seize new opportunities by continuously monitoring the business environment and adjusting their strategies and operations accordingly. They can also respond more quickly and effectively to emerging threats, minimizing their impact and preserving their competitive advantage.

These benefits are not just theoretical; a growing body of research and real-world evidence supports them. For example:

  • A 2020 study by Deloitte found that companies with mature risk management practices outperformed their peers by 20% in revenue growth and return on equity. [5]
  • A 2019 report by the World Economic Forum found that companies with strong environmental, social, and governance (ESG) performance tend to have higher valuations, lower costs of capital, and better long-term financial performance than their peers. [6]
  • A 2018 survey by PwC found that companies with advanced compliance functions were 2.5 times more likely to achieve their strategic objectives than those with less mature functions. [7]

Of course, achieving these benefits requires more than just a shift in mindset. It requires a systematic and disciplined approach to risk management and legal compliance, which is embedded into the organisation’s fabric and supported by strong leadership, robust processes, and a culture of integrity and accountability.

However, the rewards of this approach are well worth the effort. As the legendary investor Warren Buffett once said, “Risk comes from not knowing what you’re doing.” [8] By taking a proactive approach to risk management and legal compliance, companies can know what they’re doing, shape their destinies, and thrive in uncertainty and change.


So, how can companies transform from reactive to proactive risk management and legal compliance? Here are some key principles and practices to guide the way:

Start with a Strong Foundation
The first step in any proactive approach to risk management and legal compliance is establishing a strong foundation of policies, procedures, and controls. This foundation should be based on a clear understanding of the company’s business model, risk profile, and legal and regulatory obligations. It should also be tailored to the company’s size, industry, and geographical footprint and aligned with its strategic objectives and values.

Some key elements of this foundation include:

  • A comprehensive risk management framework that identifies, assesses, and prioritizes risks across the organization
  • A robust compliance program that ensures adherence to all relevant laws, regulations, and industry standards
  • Clear policies and procedures that govern key areas such as data privacy, cybersecurity, anti-bribery and corruption, and whistleblowing
  • Regular training and communication to ensure that all employees understand their roles and responsibilities in managing risk and complying with the law

Embed Risk Management and Compliance into the Business

Once the foundation is in place, the next step is to embed risk management and legal compliance into the business’s day-to-day operations. This means making these functions an integral part of decision-making, performance management, and resource allocation at all levels of the organization.

Some ways to achieve this include:

  • Incorporating risk and compliance considerations into strategic planning, budgeting, and project management processes
  • Establishing clear accountability and ownership for risk management and compliance at the board, executive, and operational levels
  • Integrating risk and compliance metrics into performance scorecards and incentive structures
  • Fostering a culture of openness, transparency, and continuous improvement, where employees feel empowered to raise concerns and suggest improvements

Leverage Technology and Data
Technology and data are essential to proactive risk management and legal compliance in today’s digital age. By harnessing the power of advanced analytics, artificial intelligence, and automation, companies can gain real-time visibility into their risk and compliance posture, detect potential issues early on, and respond more quickly and effectively to emerging threats.

Some examples of how technology and data can be leveraged include:

  • Using machine learning algorithms to monitor transactions and detect suspicious activity in real-time
  • Deploying robotic process automation (RPA) to streamline compliance processes and reduce manual errors
  • Leveraging natural language processing (NLP) to analyze unstructured data such as emails, social media posts, and customer feedback for potential risks and issues
  • Building predictive models to forecast potential risks and optimize risk mitigation strategies

Foster a Culture of Integrity and Accountability

Ultimately, the success of any proactive approach to risk management and legal compliance depends on the organization’s culture. A culture of integrity and accountability, where everyone from the top down is committed to doing the right thing and taking responsibility for their actions, is essential for long-term success and resilience.

Some ways to foster this culture include:

  • Leading by example, with the board and executive team setting the tone and modelling the desired behaviours
  • Communicating regularly and transparently about the company’s risk management and compliance efforts, as well as the role that everyone plays in supporting them.
  • Providing regular training and education to build risk management and compliance capabilities across the organization
  • Recognizing and rewarding employees who demonstrate strong risk management and compliance practices and holding those who are not accountable

Real-World Examples


To bring these principles and practices to life, let’s look at some real-world examples of companies that have successfully transformed their approach to risk management and legal compliance:

HSBC

HSBC, one of the world’s largest banks, has significantly invested in its risk management and compliance functions in recent years in response to high-profile scandals and regulatory actions. The bank has established a new global risk and compliance organization, strengthened its policies and procedures, and deployed advanced analytics and automation tools to monitor transactions and detect potential real-time issues. It has also launched a company-wide training program to build risk management and compliance capabilities across the organization and tied executive compensation to risk and compliance performance. [9]

Unilever

Unilever, the global consumer goods giant, has embedded sustainability and social responsibility into its core business strategy and has made proactive risk management and legal compliance a key enabler of this strategy. The company has established a comprehensive risk management framework that identifies and assesses risks across its value chain, from sourcing to product use and disposal. It has also set ambitious targets for reducing its environmental footprint and promoting social equity and has integrated these targets into its performance management and reporting systems. Unilever has also been a leader in transparency and stakeholder engagement, regularly communicating its progress and challenges and seeking feedback from customers, investors, and other stakeholders. [10]

Rolls-Royce

Rolls-Royce, the British engineering and aerospace company, has faced significant challenges recently, including a corruption scandal and a series of technical issues with its engines. In response, the company has overhauled its risk management and compliance functions, establishing a new ethics and compliance organization and strengthening its policies and procedures. It has also deployed advanced analytics and simulation tools to model potential risks and optimize its design and manufacturing processes. Rolls-Royce has also pioneered using digital twins, virtual replicas of its physical assets that allow it to monitor and predict performance in real-time and proactively address potential issues before they arise. [11]

Conclusion

In today’s fast-moving and unpredictable business environment, a reactive approach to risk management and legal compliance is no longer sufficient. Companies that fail to proactively identify, assess, and mitigate risks and stay ahead of regulatory change are setting themselves up for failure.

By embracing the principles and practices of proactive risk management and legal compliance, companies can avoid these pitfalls and create a powerful source of competitive advantage. By embedding risk management and compliance into the very fabric of their organizations, leveraging technology and data to gain real-time visibility and insights, and fostering a culture of integrity and accountability, they can drive long-term success and resilience in the face of uncertainty and change.

References
[1] Federation of Small Businesses (2021). Small Business Crime Survey 2021. https://www.fsb.org.uk/resources-page/small-business-crime-survey-2021.html

[2] Ponemon Institute (2020). Cost of a Data Breach Report 2020. https://www.ibm.com/security/data-breach

[3] Institute of Directors (2019). Cyber Security: Underpinning the Digital Economy. https://www.iod.com/news/news/articles/Cyber-Security-Underpinning-the-Digital-Economy

[4] Churchill, W. (1931). Fifty Years Hence. Strand Magazine.

[5] Deloitte (2020). The Future of Risk Management in the Digital Era. https://www2.deloitte.com/us/en/insights/industry/financial-services/future-of-risk-management.html

[6] World Economic Forum (2019). How to Set Up Effective Climate Governance on Corporate Boards: Guiding Principles and Questions. https://www.weforum.org/whitepapers/how-to-set-up-effective-climate-governance-on-corporate-boards-guiding-principles-and-questions

[7] PwC (2018). PwC’s Global Economic Crime and Fraud Survey 2018. https://www.pwc.com/gx/en/services/advisory/forensics/economic-crime-survey.html

[8] Buffett, W. (2018). Letter to Shareholders. Berkshire Hathaway.

[9] HSBC (2021). Risk and Compliance. https://www.hsbc.com/who-we-are/risk-and-responsibility/risk-and-compliance

[10] Unilever (2021). Sustainability. https://www.unilever.com/planet-and-society/sustainability/

[11] Rolls-Royce (2021). Sustainability. https://www.rolls-royce.com/sustainability.aspx