Looking Glass Report 2020
Section 3: Technology and Innovation
The risk landscape
Clyde & Co is pleased to present Section 1 of the Looking Glass Report 2020, in collaboration with professional member network Winmark. The annual Looking Glass Report investigates trends and developments that impact senior legal leaders, both in-house and in private practice. Section 1 considers the Risk Landscape – and later sections look at Growth, Technology and Innovation, and the Role of the GC in turn.
Our research has traced how GC and Board perceptions of the risk landscape have been changing as the COVID-19 crisis has evolved and addresses how this will impact their future strategies and actions.
The key components that have shaped the risk landscape in recent years have not changed. However, they are now viewed through the lens of an epidemic that has fundamentally altered our assumptions.
COVID-19 has turned what was already a challenging risk environment into a short-term crisis management situation without precedent. The rules governing how General Counsel and their legal teams tackle the risks presented by globalisation, complex and digitised supply chains, AI and automation are being re-written at pace.
In the short-term legal teams are focused on analysing contracts, reviewing force majeure clauses, and termination and suspension rights. They are also focused on the short-term impacts of production interruptions and disrupted supply chains, with one eye looking ahead to what implications the current experiences will have for future risk management.
Longer-term, it is abundantly clear from our conversations with General Counsel and Board Directors that many of the risks that were expected to have an impact over the next five to ten years have been abruptly brought into sharp focus.
COVID-19 is top of every agenda and I bet that very few businesses had this in their risk analysis. The biggest risk to the business is something you haven’t thought of.
General Counsel, Financial Services
Market and Economic risk: Dealing with the existential threats of maintaining liquidity and access to cash in the context of suddenly plummeting customer demand is the primary focus for most organisations.
Technological risk: Digitisation of operations has accelerated at a pace unthinkable to most organisations at the start of 2020, with profound implications for operations, security, business accommodation and customer delivery and distribution.
Over a relatively short period of time we’ve gone from 300 people enabled for remote working to more than 2000 including call centre staff being able to do their jobs from home.
Paul Donovan, NED, Thames Water
Organisational risk: Staff well-being and mental health has become a short-term priority and has highlighted practices that may well prove to be beneficial in the long-term as remote working becomes more common. Employee engagement initiatives have accelerated at pace alongside digital engagement. Team management and managing change had already moved up the hierarchy of concerns prior to COVID-19 as attraction, development and retention of skilled teams had become an increasingly pressing challenge, exacerbated by the need to develop skill resources to deliver digitalisation and defend against data privacy and cybersecurity threats. The crisis has also revealed shortcomings in succession plans as leaders have become sick and replacements have been required across all departments.
Awareness of mental wellbeing has been central to our approach and we’ve worked with a clinical psychologist looking at building resilience. This focus on soft skills, mental wellbeing and communication has helped us as a legal function to cope with the recent sudden changes. We have also organised exchanges to match resource supply and demand across the group and its locations.
Oliver Canning, Chief Legal Counsel, NBCU International
Political risk: COVID-19 has caused government intervention on a scale that hasn’t been seen for decades. How much, how fast, and in what ways governments reduce their economic role will be one of the most important questions of the next decade. Last year, Brexit and the US-China trade war caused concerns about political risk to spike to the highest levels in the study’s history. The global trade relationship with China is now more uncertain than ever and organisations are rapidly re-evaluating their supply chains and manufacturing strategies.
With most businesses likely to be operating to some extent with public money, government scrutiny of business is likely to increase. This could mean increased regulation, particularly in the areas of supply chain management and employee and public health.
At the start of the crisis we asked Boards and General Counsel about their organisation’s preparedness to respond to high impact risk events. While the aggregate figures were similar, there were noticeable divergences, such as on technological and organisational risks where Board Directors were more positive.
TEST Organisation preparedness for risk
Under the pressure-test conditions of the COVID-19 crisis, it would appear that Board Directors may have had a more accurate view of the position. All the feedback we have received from General Counsel has expressed how impressed they have been with their organisation's ability to respond and adapt quickly.
The areas of divergence have been largely consistent year on year. A silver lining of the current crisis may be that Boards and General Counsel will be forced to discuss attitudes around legal risk in order to find greater understanding and alignment. Overall, it is striking how aligned Board and General Counsel perspectives are, challenging the characterisation of the legal function as being particularly risk averse.
Against the background of COVID-19, uncertainty over the influence of China, changing societal values around work, political and market pressures to respond to environmental concerns, data and cyber risks, the technology skills gap, the increasingly data driven nature of organisations and ever-increasing connectivity and mobility, it is no surprise that most respondents perceive an increase in risk, and also perceive that the pace of change is accelerating faster over time.
TEST Complex risk landscape
Prior to the crisis legal functions also experienced a particularly demanding period of new and increasing regulatory requirements, including both regional legislation (such as GDPR) and additional sector specific regulation.
Complexity comes from the sheer volume of information. If Trump tweets, we have to react to that. We have to acclimatise to high volumes of information which now includes intuitive and personal views due to the platforms available.
Ronald Cheung, Legal and Risk Management, Fung Group
Preparing for an increasingly challenging risk landscape is a priority for both Boards and General Counsel alike. The boundaries between legal, reputational and regulatory risk have continued to become less clear, so integrating and aligning activities of separate departments (such as corporate affairs, risk and compliance) is more necessary than ever. It is an encouraging step in achieving this alignment that General Counsel and Board Directors largely agree about the risk priorities they face and the extent to which competitive pressures are increasing the appetite for risk.
TEST Brexit to have long term financial impact
Although Brexit is no longer the primary focus it once was, General Counsel and Board Directors remain concerned about Brexit’s impact on their business, the emphasis is now less about long-term financial impact and more about operational issues such as staff morale.
Nearly half expect the long-term impact on staff morale to be negative. Impact on supply chains is also expected to be negatively affected, and a third expect short term financial performance to suffer.
Before the lockdown started, the greatest impact of the #MeToo movement was perceived to be on changing the work environment and culture, with Board Directors particularly recognising a transformation. However, relatively few respondents said that #MeToo directly impacted specific operational processes such as use of NDAs or people management procedures and processes.
This may imply that the fundamental legal and operational framework to address concerns raised by #MeToo is largely in place; and that the most significant impact has been raising awareness and changing cultural attitudes. The impact has been more about how issues relating to sexual misconduct are perceived and considered rather than changes in the processes to deal with them.