The Persistance of Risk Post-Mitigation: A Corporate Perspective

When a company assesses its risk management post-reaction to a risk event, several factors come into play. There are two main types of risk to consider: industry-specific risk and systemic risk. Industry-specific risks are linked to specific sectors or businesses, whereas systemic risks pertain to broader economic and regulatory environments that affect multiple industries across the board.

Industry-Specific Risks: Specific to Economic Sectors

Industry-specific risks are those unique to particular sectors or types of businesses. These can be managed through a variety of strategies, including market diversification, risk assessment, and implementing robust internal controls. For instance, a manufacturing company might address supply chain disruptions by securing alternative suppliers or improving inventory management. These risks are often more proactive and are within the control of the company's management to mitigate.

Systemic Risks: Beyond Individual Control

Systemic risks, on the other hand, are pervasive and extend beyond the control of individual companies or even entire industries. These risks are often the result of broader economic, regulatory, or political factors. The recent situation in a nation like India exemplifies this. The Indian government's financial regulatory changes, such as the decision to demonetize high-value currency notes, had a sweeping impact on the banking sector and its customers. This not only led to a liquidity crunch but also disrupted corporate planning across various industries, causing significant financial distress and bankruptcy.

Case Study: Deleveraging the Banking Industry

In this context, the impact of a Leviathan regulatory change can be seen in the case of Financial Institutions like KFA and Gilli. These firms served high-end and business sectors, which were hit hard by regulatory changes that effectively destroyed their markets. Consequently, their revenues plummeted, leading to default and ultimately bankruptcy. Such incidents highlight how systemic risks can render mitigation strategies ineffective, as the company's performance is directly linked to the broader economic environment.

Strategies to Tackle Systemic Risks

Given the nature of systemic risks, companies can still take proactive measures to minimize their impact. Here are some strategies that can be employed:

Global Market Expansion: Diversifying operations into different regions or markets can help mitigate the risks associated with localized economic downturns or regulatory changes. Strengthening Corporate Governance: Implementing robust internal controls and board oversight can help ensure that the company remains resilient in the face of broader economic challenges. Strategic Partnerships: Forming alliances or strategic partnerships can provide a financial cushion and alternative revenue streams in case the primary market fails. Forward Planning and Forecasting: Investing in advanced analytics and predictive modeling to anticipate potential regulatory or economic changes can provide early warnings and allow for timely adjustments.

Conclusion

While industry-specific risks can be managed through strategic risk mitigation, systemic risks often transcend individual company control. Understanding and preparing for systemic risks is crucial for long-term corporate resilience. Companies must remain vigilant, diversify their risk exposure, and continuously adapt to changing economic environments to ensure sustained performance and viability.