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In an Evolving Economic Climate, Businesses Must Become Less Reactive to Short-Term Volatility

As the World Economic Forum gathered in Davos, many commentators made reference to Thomas Mann's novel The Magic Mountain - is the world economy making a recovery, or in fact suffering from an incurable malaise?

This remains to be seen: while falling unemployment figures give some comfort, snow back home has hit consumer spending hard. The central chapter of Mann's novel - in which the protagonist becomes hopelessly lost in a snow storm in which contours, slopes and sky become indistinguishable - has a valuable message for today's business leaders. In an ever-evolving economic climate, we must be prepared to feel our way, to negotiate the ups and downs with determination and care, and to keep a steady eye on long-term goals.

There will always be economic shocks, and this uncertainty simply cannot drive business strategy. Volatility is a feature of speculative markets, not good business management.

A recent survey conducted by CIMA, along with our colleagues at the American Institute of CPAs (AICPA), asked over 1,300 global business experts for their opinions on whether businesses' reaction to economic uncertainty is proportionate to the true risks involved. These CFOs, CEOs and FDs agreed that organisations must be more resilient and less susceptible to macro-economic volatility.

The theme at Davos this year was "resilient dynamism". This aspirational headline is a guiding light, yet a tall order - and David Cameron's unveiling of an in-out referendum on Europe in 2017 caused further consternation among business leaders who responded by saying that this uncertainty will impact on business confidence. Nick Clegg spoke out, saying that Cameron's plans for re-negotiation are 'vague', and stressing that this uncertainty 'discourages investment and inhibits jobs and growth, which has to remain our absolute priority.'

As the Coalition parties set their sights on 2015, they will become much less reticent about explicitly declaring their separate priorities - and Cameron may continue to make statements and promises contingent on a Conservative majority victory. Uncertainty is the order of the day, yet businesses must chart a steady course, defining their risk appetite and maintaining the right balance of risk mitigation and ambition.

Respondents to the Chartered Global Management Accountant (CGMA) survey were asked to assess the reaction to the U.S. debt crisis, with 60% reflecting that business is too sensitive to economic crises. Despite widespread doom and gloom during the run up to the Fiscal Cliff and during the January fall-out, only 31% of respondents believe the ongoing US debt crisis will ultimately push the global economy towards recession, suggesting that fears were overplayed. Meanwhile, 57% agreed that their organisation must seek new ways to be resilient and less susceptible to macro-economic volatility of this kind.

Grey swans, such as the U.S. debt crisis, are prompting organisations to flap and cut spending and investment at a time when innovation is absolutely vital to our economic health. The seizing of opportunities is key to long-term survival, and businesses which prepare by putting mitigations in place to address uncertainty will be able to stand firm in the face of economic change.

Companies must adjust their risk radars and anticipate the impact of grey swans without being diverted from their long-term strategy. They need accurate management information that can support effective investment and risk mitigation decisions. They must fully understand their business model and the drivers that can create, and destroy, value.

As the snow globe is shaken once more, we must plot a steady course through the storm.

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