Executive summary

The worst of the financial crisis may be over, but the global economy remains an immensely challenging environment for the world’s business leaders. Recent events in Tunisia, Egypt and Libya raise the prospect of further political instability in Africa and the Middle East. Continued sovereign debt problems in the euro zone are threatening the sustainability of the single currency. Rapid public spending cuts in the UK are likely to hamper its recovery from recession. And a similar problem might now befall the US economy following President Obama’s announcement that he intends to cut government spending significantly.

Despite these risks to growth, business leaders are under pressure to deliver improved results for investors and other stakeholders. This means they need to balance their company’s exposure to risk with the need to deliver earnings growth and attractive returns on investment. Striking that balance makes it critical that businesses have as clear an understanding as possible of the risks likely to affect their business over the coming year. If business leaders are not aware of the risks facing their company, and the options open to them in dealing with these, then they will be less likely to achieve their goals.

The purpose of this report is to highlight the key risks currently facing the global economy and to increase awareness about the strategies being deployed to deal with these risks. To shed light on these topics, the Economist Intelligence Unit conducted a global survey of 275 senior executives. The main findings of the research are:

• Firms see volatile exchange rates as the top risk for the year ahead. More than half of the respondents to our survey see fluctuating exchange rates as one of the top three risks to their business over the next 12 months.

• There is evidence of a “preparedness gap” in some areas of risk. While 51% of respondents are concerned about currency risk, only 43% have plans in place to deal with it. Similarly, while 22% think increased regulation is a key risk, only 13% say their firms have any plans in place to deal with it.

• Firms may be overconfident about their capacity to deal with risk. More than 30% of respondents who were hit by a severe risk in the past 12 months experienced a decline in revenue at their firm of between 11% and 25%. Despite this, the majority of respondents to our survey tend to be very or somewhat confident in their capacity to deal with risk. This may be evidence of optimism bias in corporate risk management practices.

• A significant minority of firms are increasing their appetite for risk. Pressure from investors means that managers are cautiously increasing their appetite for risk. In the area of business and strategic risk, 34% of firms plan to increase their risk exposure in the next 12 months, and this figure rises to 45% in the banking sector. Appetite for business and strategic risk is most pronounced in the Asia- Pacific region, where 42% of firms plan to increase their exposure in the coming year.

• Perceptions of risk vary between industries and across regions. For example, 23% of respondents identify regulation as a high risk for the year ahead, but this figure rises to 53% among respondents from the banking sector. Meanwhile, nearly 38% of respondents from Asia-Pacific see fraud and corruption as a high risk over the next 12 months, but this concern is much weaker in North America (10%) and Western Europe (18%).

• Longer-term shifts in risk management are underway despite resource constraints. Few firms are increasing the resources available for risk management. But many are trying to improve their risk management practices by, for example, introducing enterprise risk management systems. As new risks continue to emerge—including those related to regulation, climate and demography—the importance of risk management for firms is only likely to grow.