Coronavirus pandemic: 'No 100% solution for averting risk'

Representative image

Nagesh Alai is a management consultant, an independent director on boards of companies and a mentor to startups. He is a co-founder of a B2B enterprise tech start-up. In his previous avatar, he has been in various leadership roles in the pharmaceutical and advertising world for over three decades. Alai retired in 2016 as the Group Chairman of the FCB Ulka Group and Vice Chairman, FCB Worldwide. He is also on the board of one of the Vodafone group companies in India.

In a conversation with Shalini S Dagar, he shares his thoughts on the coronavirus pandemic and how if at all such a calamity could have been mapped in the risk management framework of any company.

Q: What do the coming few months look like? A: Given the pall of lockdown and a continued uncertainty about the return to normalcy, the next quarter or for that matter the year ahead looks bleak overall for the economy and people. The suspension of economic activities, either partially or fully depending on the sectors, is going to lead to revenue and profit de-growth. The impact will be seen across sectors. Termination of jobs and income plunge of daily-wagers will hit demand and consumption, both in urban and rural areas. I expect companies and the economy to take at least a year to bounce back to pre-COVID-19 levels. The stock market plunge in India and across the globe is just a reflection of the on-ground business reality of today and the challenges for the year ahead. The drop in interest rates has a story in it. The government stimulus can only do that much and is a temporary solution.

Q: Could companies ever have been adequately prepared for something like the coronavirus pandemic? A: No. Nobody can be prepared...except for the normal cautionary stuff. Coronavirus became a pandemic. There is no 100 percent solution for averting risk.

Q: What about the risk management discipline within companies? Don’t frameworks help? A: Notwithstanding the fact that a risk management framework is an exhaustive process encompassing the sustainability of the business per se and its preparedness for continuity in the face of outlier events and threats, no framework can fully help in force majeure situations like COVID-19.One may say that work from home (WFH) has helped - but it has helped only in administrative aspects and not really in sales and profits maintenance or growth. The shedding of workforce vindicates this. I have a belief that one can either react or respond (proactively) in a given situation. Having a thought-through risk management framework is a proactive response in anticipation. A situation like the global spread of the microbe and the resultant lockdown can only be managed with proactive reactions like WFH etc. We can do our best in attending to business continuity, customer care, people morale, etc. Quite frankly, the government and several companies as well as the civil society have been remarkably responsive and resilient.

Q: In general, are boards looking at risk management functions properly? A: Boards are not giving enough importance (to the issue). There is a confirmation bias that happens with regard to risk management. For example, you are used to working in a certain way. The company has a certain manufacturing process for say 10-15 years and it has held it in good stead. Unless you revisit or relook at it from a zero base, you will always find everything perfect with the (existing) system. I think organisations need to develop that ability to evaluate risk and potential risk. I don’t think they have developed it completely.

Q: Do reporting structures matter in the discipline of risk management? What about the Chief Risk Officer reporting to the CFO? Is that desirable? A: It is not a question of reporting to one individual. Let me give you a roadmap. I am supposed to establish a risk assessment response for a company. Very clearly, there are three people I will necessarily keep in the system who the CRO will report to -- the technical person (say production in charge in a manufacturing unit), the finance head and the CEO. Simply because there are multiple facets to risk. Risk is on the production side, risk is on loss of market share, and whatever risk you face has a financial implication. Every single activity of a company or exposure translates to money. The CRO, therefore, in my opinion cannot be reporting to a single person. It will not work that way.

Q: What about reporting directly to the board? A: The board cannot look at everything. They also need to delegate responsibility. Finally, (whichever way you look), the risk management committee of the board has to comprise these three individuals.