Risk Communication | Socium

The Importance of Effective Risk Communication for Businesses in a VUCA World

Summary. Ongoing risk communication before, during, and after a crisis is essential for businesses to navigate through a volatile, uncertain, complex and ambiguous (VUCA) environment while maintaining stakeholders’ trust and credibility.

If you were to describe the market outlook using one term, what would that term be? Uncertain, turbulent, dynamic, disruptive, complex, volatile, in flux, or unpredictable? The global pandemic in 2020 made it abundantly clear that it has become increasingly difficult to grasp the world and deal with the things happening around us. 

Over the past few years, the notion of a “VUCA World” has been gaining popularity as a term to cover the various dimensions of this new normal — an increasingly volatile, uncertain, complex and ambiguous environment in which business leaders are called to lead.

Risk Communication | Socium
In a volatile, uncertain, complex and ambiguous world.

Drawing on the leadership theories of Warren Bennis and Burt Nanus, the concept of “VUCA” was first used by the United States Army War College in the late 1980s to describe the disruptive and uncontrollable conditions resulting from the end of the Cold War. More recently in 2014, a Harvard Business Review article by Nathan Bennett and G. James Lemoine explains how VUCA can be applied in strategic leadership to help identify, prepare for, respond to, and mitigate different types of risk events. 

Against this backdrop, we need to understand the importance of risk communication for businesses to navigate a VUCA World. 

Understanding and Identifying Business Risks

Before we delve further into how to communicate risks effectively, we should first understand what different types of risks that businesses might be exposed to and how these risks are produced. From a business perspective, risks can be understood and evaluated from the following five aspects:

1. Compliance Risk

This  refers to the possibility of an organisation facing legal repercussions due to its inability to adhere to laws as well as industry regulations and norms.

2. Operational Risk

This refers to the possibility of losses arising from ineffective or failed internal processes. This can be overlooked issues and control failures caused by people — employee conduct, employee error, employee wellbeing; or systems — theft and fraud, organisational change, IT disruption, data breach etc. — that can hurt the company’s bottom line and reputation. 

Operational risks can also be related to external factors, such as how geopolitical events,  natural catastrophes — fires, earthquakes, flooding, hurricanes, climate change, etc. — and physical risks specific to the company location (e.g. proximity to a nuclear plant) that may uniquely impact operations.

3. Fraud and Security Risk

Fraud risk refers to the possibility of financial, material or reputational loss caused by the fraudulent action of persons internal or external to the organisation. In the age of digitalisation, organisations are increasingly vulnerable to cybersecurity threats — malicious attempts by an individual or group to gain unauthorised access to a network, steal or damage confidential data, or destroy IT systems. 

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Strong cybersecurity measures are needed to protect businesses. Source: Photo via Shahadat Rahman on Unsplash

4. Financial Risk

Financial risks can be further classified into currency risk, default risk and liquidity risk. They can occur when a company doesn’t perform debt management or financial planning tasks, or when market changes, or business operations threaten a company’s financial standing.

5. Reputational Risk

Faulty products or services, poor customer support experiences and negative publicity about a business or leadership are all reputational risks that will negatively affect relationships with various stakeholders. It’s important to note that not addressing business risks is, in itself, a reputational risk. For instance, non-compliance with laws and regulations, lengthy operational outages, security breaches, fraud incidents and poor financial performance can all adversely affect a company’s reputation.

Business owners need to be aware of how different types of business risks can interact with each other and potentially compound the impact on their business in a VUCA world. For example, a natural disaster like flooding could cause physical damage to a company’s facilities, which could then lead to operational disruptions, financial losses and reputational damage. It can even be catastrophic if there is fraud risk on top of flooding, for example. Therefore, it is crucial for business owners to take a holistic approach to risk management, identify potential interdependencies between different types of risks, and develop strategies to address them accordingly.

Risk Communications | Socium
A natural disaster like flooding can cause, or compound other types of risks. Source: Photo via Chris Gallagher on Unsplash

The Ongoing Process of Communicating Risks

Risk communication is a crucial aspect of risk management. Ongoing communication with stakeholders is critical to building and maintaining trust and credibility, and to ensuring that everyone is informed and engaged in the risk management process.

Risk Communication | Socium
Clear and timely communication before, during and after a crisis is key.

1. Proactive Communication: Building Awareness of Potential Risks

Effective risk communication requires businesses to take a proactive approach in communicating with stakeholders before an event occurs. This involves raising awareness of potential risks and putting in place strategies to manage those risks. By engaging with stakeholders, be it clients, employees or partners, businesses can obtain feedback on the adequacy of the strategies and make necessary improvements. Proactive communication can help businesses establish trust, demonstrate accountability, and enhance their reputation.

2. Crisis Communication: Clear and Timely Information Sharing

A crisis can happen when there is a risk, or multiple risks. During a crisis, clear and timely communication is essential to ensure that stakeholders are informed and that response efforts are coordinated. Communication channels such as social media, email or public statements can be leveraged to provide stakeholders with up-to-date information. Effective crisis communication requires using language that is clear, concise and empathetic to reduce confusion and anxiety. By providing stakeholders with regular updates, businesses can build trust and maintain their reputation even in the face of a crisis.

3. Post-Crisis Communication: Rebuilding Trust and Mitigating Reputational Damage

After a crisis, businesses should continue to communicate with stakeholders to provide updates on the status of recovery efforts and any changes to risk management strategies. Effective post-crisis communication can help businesses to rebuild trust and mitigate reputational damage. Transparency about the event and its impact, as well as providing reassurance about the steps being taken to prevent similar events from occurring in the future, can be key to restoring stakeholder confidence. By communicating openly and honestly with stakeholders, businesses can demonstrate their commitment to accountability and responsibility.

Risk Communication | Socium
Businesses should communicate honestly about risks before, during, and after a crisis. Source: Photo via Brett Jordan on Unsplash

In a VUCA world, effective risk communication is more critical than ever before. With a plethora of risks, ranging from natural disasters to cybersecurity threats, businesses must be prepared to address risks proactively and communicate them transparently to their stakeholders. By proactively communicating risks throughout the risk management process and developing effective communication strategies, businesses can build resilience in the face of uncertainty, maintain the trust and confidence of their stakeholders, and potentially gain a competitive advantage in their respective industries. 

Because it’s the thought that counts – Socium Thoughts bring together our thoughts and opinions on all things communication.

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