Looking Glass Report 2020
Section 3: Technology and Innovation
This year’s annual Looking Glass report, in partnership with executive network Winmark, is the most global representation yet of the opinions of general counsel, their in-house legal teams and the senior board and C-suite decision makers they work with, on the risk landscape their organisations face and their ability to navigate it effectively.
The three areas of risk that business leaders expect to have the biggest impact on their business in the next two to three years are People, Regulation and Technology.
The report findings illustrate the clear impact the pandemic continues to have on the risk landscape as the world heads into a third year under its shadow. The findings also suggest that fundamental shifts in how organisations manage risk are taking place, and that GCs and their in-house teams (with the support of their external counsel, of course) are continuing to play an increasingly central role in identifying and mitigating those risks, as part of organisations’ strategic responses.
While the risks identified are clearly dominated by the pandemic and its aftershocks – including the supply chain crisis and the skills shortage so many organisations now face - other systemic risks have advanced firmly up the corporate agenda, despite, or perhaps because of, the experience of the pandemic. Climate change, long identified in this report as a looming threat, has not only jumped up the risk register this year but is seen as the challenge organisations are least prepared to deal with.
Digital and technology related risks meanwhile remain high on organisations’ agendas. However, in relative terms, these concerns have abated, perhaps because of the largely successful adoption of digital technologies that was, in effect, forced on organisations by the pandemic. Despite this, the ever present and intensifying threat from malicious cyber actors will surely mean that technology remains at the top of the risk index in the coming years.
Although we have witnessed another challenging year across the insurance sector, the industry has remained remarkably resilient even as it has been stymied by changing revenue in classes of business affected by the pandemic. The sentiment in this year’s survey – that the interlinked risks of people and technology are top of the risk agenda – is writ large in the insurance sector. This is most clearly illustrated in the microcosm of the Lloyd’s market’s continuing Blueprint reforms, which has among its priorities the aim of developing a highly-skilled workforce that combines the best of the market’s traditional strengths with new digital skills. The pandemic has only served to hasten this as a priority.
James Cooper, Partner, Clyde & Co
The top risks – People, Regulation and Technology – are recognised across by all survey respondents. As a former Group Legal Counsel, and as a corporate lawyer working with businesses every day, I am always extremely interested in where there is alignment, or not, between these. For example, Only 45% of Boards identify increased regulation as a top risk, when compared to 70% of GCs and, higher again, 75% of C-Suite. Is this a case of each category focussing on their responsibilities or does this mean more agreement is needed on a business’s specific risks? In terms of change to risk perception of Climate Change since our last report, we see a 32% uptick from GCs but only 10% increase from Boards. In contrast we see similar changes year to year for People risk perception, but Boards have increased more than GCs – perhaps demonstrating that there is scope for alignment. From an M&A perspective, buyers should perhaps increase focus on evaluating risk perception and risk readiness of potential targets.
Stephen McKenna, Partner, Clyde & Co
People risk is identified as the highest impact risk overall. The ability to attract and retain staff will become of even greater importance as a driver of competitive advantage. Staff well-being will continue to be a priority in order to attract staff, aid retention and ensure that higher numbers of remote workers are fully supported.
People, regulation and technology risk all resonate strongly with business leaders and GCs in the construction industry, but in a number of ways which are specific to the sector. The industry is facing a “demographic timebomb” in many regions, as new entrants fail to keep pace with retirees and, in the UK, Brexit has exacerbated this problem by throwing up regulatory obstacles to the import of European labour. These challenges highlight the importance of continued efforts by industry leaders to make construction an attractive, stimulating and socially valuable alternative to an office-based career. One of the key ways to achieve this is by embracing the disruptive opportunities that new technology provides to develop truly modern methods of construction – whether by using digital design and smart data to optimise performance and connectivity, or by replicating the standardised precision of advanced manufacturing, via robotics and production line techniques (whether on or off-site). But the overarching objective for all working in the industry remains safety – both for those who create our built environment and for those who live in it. Extensive regulation should underpin this, but persistent failures across the globe – such as the Grenfell Tower fire in the UK, the Genoa bridge collapse in Italy, and concerns for migrant workers on the Qatar World Cup – show just how much remains to be done to reduce the sector’s inherent risks to an acceptable level.
Robert Meakin, Partner, Clyde & Co
After an intense and unprecedented period of financial loss as the pandemic took hold, the aviation industry is currently preparing itself for recovery against the backdrop of geo-political uncertainty in the form of constantly-evolving regimes for immigration and entry. We are seeing an uptick in recruitment, an eagerness to address the opportunities and challenges presented by climate change, as well as a willingness to build on the technological advances made during the pandemic from a business continuity perspective. Businesses in the sector are grappling with the issue of how to recoup financial losses whilst maintaining and meeting short to long term sustainability objectives and at the same time, retaining their trained highly skilled workforce. In order to do this, aviation and airline businesses will need to be bold and start looking at their risk portfolio from a global perspective rather than siloed by type. There are clear lessons to be learned from other industries that have a more integrated approach to risk management which may assist aviation stakeholders to build resilience in a post-pandemic world.
Carol Anderson, Global Aviation Professional Support Lawyer, Clyde & Co
Regulatory risk is identified as the top risk area by GCs (70%) and is second place in the risk hierarchy for all respondents (64%).
Dealing with an increasingly regulated global business environment (including investor and consumer driven ESG regulations and rapidly growing implementation of global privacy and data protection regulations) is expected to have a bigger impact on GCs and their legal departments than any other risk in the next two to three years.
Most respondents feel it is too early to know what the long-term implications of COVID will be on the public health regulatory environment. Organisations have successfully addressed the short-term challenges which are keeping a careful eye on how the pandemic will influence public, health policy and what that will mean for their risk management frameworks. It is, however, widely accepted that COVID may be a live agenda item for many years to come.
The survey results echo conversations I’ve had with GCs over the past year, and in particular discussions as to what the “Governance” aspects of ESG really means on a practical level. It will be very interesting to follow how this thinking develops in the next year. In the UK, all eyes will be on whether there will be a move to amend the Companies Act, which already puts a legal obligation on companies to consider ESG factors, and offer the clarity that businesses have been calling on for some time.
Chris Burdett, Partner, Clyde & Co
Risks related to IT disruption, data loss issues or implementation of new technology are in third place overall, and in second place for Board respondents. Remote working, acceleration of ecommerce and growing digitisation of operations have heightened concerns about data security.
While the pandemic has accelerated the digital revolution in many sectors, trade finance is still grappling with risks associated with technology that has the potential to transform the industry. Just this last month we have seen an interesting first step with Singapore and the UK signing an agreement on digital trade facilitation to reduce barriers to digitally-led trade through electronic invoicing and electronic bills of lading.
The trade finance industry has suffered substantial losses in recent years and it’s clear that the industry understands the importance of modernising, especially through electronic documents. But businesses are craving legal certainty, in particular around how these documents can be treated consistently across different jurisdictions which the ICC Banking Commission and Clyde & Co surveyed in 2018. Whilst we seem some way off achieving standardisation, it shouldn’t stop those sophisticated businesses with appropriate trade flows from looking to mitigate these technology risks and embracing digital solutions
Leon Alexander, Partner, Clyde & Co
Consultations for last year’s study started just as the pandemic began and continued throughout the initial challenging period of crisis management. In the intervening year, climate change has seen a big increase as a risk management priority for both GCs (a 32% increase) and the Board (a 10% increase).
In a business environment where a clear environmental strategy is increasingly seen as being important to customers and investors – and therefore good for business – GCs will need to respond to governments, regulators and other key stakeholders and help their organisations demonstrate accountability and transparency in public disclosers around environmental issues.
When asked about their organisation’s preparedness to respond to high impact risk events, Board, GC and C-Suite respondents generally agree on the risks they are least prepared for: ‘Climate change’, ‘Societal’, ‘Geopolitical’ and ‘People’ risks.
GCs are considerably more positive than Board Directors about their organisation’s preparedness to deal with ‘People’ challenges. This is consistent with the higher emphasis placed on these challenges by Board level respondents. Board respondents and CEOs are focused on ensuring engagement with remote teams, promoting a positive culture and attracting and retaining staff. Whilst these issues are also relevant for GCs, their focus is directed at the regulatory and governance implications of people management.
Unsurprisingly, respondents perceive an increase in risk complexity. Indeed, the risk landscape has become so complex and demanding that there is also strong agreement that ‘addressing systemic risks such as pandemics and climate change will require us to develop new methods of risk management’ and that ‘risk management activities play a more important role’ within organisations.