Unleash Adhocracy to Face Emerging Risks

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Emerging risks are newly developing risks that cannot yet be fully assessed but could, in the future, affect the viability of an organisation’s strategy and business model. A risk-savvy culture sometimes needs an informal adhocracy to identify emerging risks in a timely manner.

While every organisation has a risk assessment process, we often hear that the process as it exists now is too static — but change never ceases, as all of us have learned in 2020. Enter adhocracy. The term “adhocracy” has evolved to describe an organisational approach that cuts across normal bureaucratic lines to capture opportunities, solve problems and get results. An adhocracy structure is flexible, adaptable and open to fresh perspectives on the business environment.

Here are 6 suggestions for management to employ adhocracy to foster a risk-savvy culture that facilitates the recognition and communication of emerging risks up, down and across the enterprise so that critical and creative thinking can flourish. Working toward such a culture will help inform the board’s risk oversight.

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Conduct brainstorming sessions.

Brainstorming is one of the most commonly applied expressions of adhocracy. It brings the right people together to focus on one or more issues of mutual interest. While these activities may be carried out through a formal management risk (or other “ad hoc”) committee, they may also be spontaneous, unplanned knowledge-sharing sessions to ascertain whether changes have occurred internally or externally that warrant closer attention. Brainstorming may focus on identifying extreme but plausible scenarios, such as a pandemic similar to COVID-19, a precipitous economic decline, an unexpected spike in interest rates or signals of impending change in the regulatory climate in key markets.

Encourage a cross-functional, cross-unit perspective to circumvent new risks.

In large organisations with different operating units, it is important to understand how support functions and units interact with each other and with outside parties. Ad hoc sessions should embrace a cross-functional, cross-unit view.

Keep it fresh.

While emerging risks may be identified through established committees, monitoring processes, and forward-looking key risk indicators, a constantly changing business environment necessitates shaking things up to encourage people to think out of the box to avoid being constrained by rules and conventions.

Pay attention to the execution of the strategy.

The National Association of Corporate Directors (NACD) in 2009 published the Report of the NACD Blue Ribbon Commission® — Risk Governance: Balancing Risk and Reward, which points out that boards need to pay attention to the risk that management may fail to execute the approved strategy either due to unwillingness or a lack of capabilities to execute it. A more recent NACD survey noted that nearly 70% of directors believe that their boards must strengthen their understanding of the risks and opportunities affecting company performance.

Watch out for “gray rhinos.”

In 2018, NACD issued a report on board oversight of disruptive risks and the importance of adaptive governance as a framework for overseeing such risks. Management should assess the velocity and persistence of significant risk events and the organisation’s response readiness.

Ad hoc sessions should carefully consider possible disruptive risk events that are high impact, high velocity and high persistence so that focused efforts are undertaken to develop and improve response plans. Apart from the so-called “black swans” — the risks that no one sees coming — these “gray rhinos” can be just as threatening if they are disregarded until it is too late.

Expect the board to play a part in recognising emerging risks.

Boards should be resourceful in looking to external sources beyond management for insights on topics that matter. These sources may include industry developments, technological advances, investor feedback, benchmarking against competitors, and changes in the regulatory environment, among others. As there is no formal playbook for the board to follow when taking this initiative, such a collective effort amounts to adhocracy at its finest.

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