Navigating the challenges in a complex environment 7 min read
We are in the midst of rapid technological advancements, shifting regulatory and political landscapes, evolving social expectations and visible impacts of climate change. In this context, Australian companies and their directors and officers are navigating an increasingly complex, inter-connected and unpredictable risk environment.
Key takeaways
As part of our ongoing CPD Series, Allens hosted a discussion with Christine Holman, a senior non-executive director with over 30 years of experience, on the emerging risks boards and management are facing in 2025. The session highlighted several key issues that are expected to shape the year ahead.
- Geopolitical uncertainty is an increasingly prominent feature of the international landscape, threatening global supply chains and operational stability.
- Inflation will continue to trouble economies around the world, spilling across borders and putting a strain on business financial performance.
- Cyber incidents have escalated in frequency, scale, sophistication and severity.
- Climate change is having increasingly tangible impacts on the natural environment in which Australian businesses operate.
- Reputational issues tie directly to company value as they are scrutinised under a media spotlight of higher political, regulatory and social expectations.
- Technological advancements are occurring faster than ever, requiring businesses to adapt quickly to respond to new opportunities whilst managing the risks they present.
The discussion also touched on the practical steps companies can take to navigate these risks, not only to avoid exposure to downside scenarios, but to capitalise on the opportunities that lie ahead.
Geopolitical uncertainty
In recent years—and indeed just these last few days—there have been growing challenges to the post-World War II, rules-based world order, which has given way to increasing geopolitical instability around the world.
Prolonged military conflicts have significantly impacted civilian populations through displacement, loss of life and heightened instability, whilst more broadly resulting in actions such as sanctions and supply disruptions. In addition, the rise of protectionist and nationalistic ideologies is now seeing the return of tariffs and pullback from previously settled global trade relationships. In this evolving environment, Australian businesses will need to remain vigilant given the importance of our trade relationship with China and our close security ties with the United States.
In addition, as we move towards a federal election this year, there is the potential for these forces to manifest in domestic regulatory and economic policy settings as our politicians react to these global trends.
Our experience has been that good governance, regular risk assessments and scenario planning, and appropriate management structures, assist to navigate these geopolitical challenges.
Prolonged inflation
At the same time, many economies including Australia have been experiencing pronounced and persistent inflation following global events such as the COVID-19 pandemic and the conflicts in Ukraine and the Middle East. These conditions have caused significant cost-of-living pressure at the individual household level, which is projected across the broader economy in the form of reduced demand and heightened uncertainty for businesses.
In an environment like this, we see best practice involving companies seeking to plan for all scenarios. This often involves stress testing financial models and, if possible, looking to diversify supply chains to reduce exposure to economic fluctuations.
Cybersecurity
In 2024, the Australian Signals Directorate saw a cybercrime being recorded every six minutes. The growing frequency of major incidents in recent years has put a spotlight on the cyber vulnerabilities of Australian businesses and the huge consequences they can have for customers and shareholders.
Cybersecurity has become a critical business continuity issue, though not all those in senior positions in Australian companies have experience in responding to cyber incidents. To bridge this gap, boards and senior management should be kept abreast of the relevant issues in this area both within and outside the company. Cyber strategies should not just be in place but be understood, and boards should challenge and validate the information they are given by management to test and assess these strategies where they see fit. This includes seeking out opportunities to learn from prominent examples in the market and undertaking live simulation exercises to test preparedness.
Climate change
Although climate change has been on the agenda for quite some time, it is an area that continues to evolve. Recent legislative reforms mean that certain Australian companies will soon publish their first mandatory sustainability reports. At the same time, we are seeing some stakeholders around the world signal a retreat from environmental initiatives and commitments, even as the physical effects of climate change continue to manifest in communities globally.
Companies will need to be ready to comply with regulations in this space as they are introduced and, as part of good business planning, take steps to identify and mitigate their exposure to climate-related risks. From a risk mitigation perspective, this is particularly pertinent in Australia given it is the second-most popular jurisdiction globally for climate change litigation.
Reputational matters
Although a company's reputation has always had intrinsic value, that value has become more tangible and apparent through the significant disruption and real financial consequences that some companies have felt when their reputation has come under the spotlight.
Through this lens, there is an increasing sensitivity amongst customers and stakeholders to incidents or behaviour within companies that—whilst not necessarily illegal—falls below public expectations. Perceived shortcomings, whether justified or not, have seen some companies suffer significant loss in shareholder value, even if the financial performance of the company was otherwise sound.
This focus has placed a spotlight on the role of the board in embedding and enforcing cultural expectations within the workplace.
Artificial intelligence
The continued development and adoption of artificial intelligence tools in the workplace has the potential to be one of the most important developments in the way we work in our lifetime. Companies that do not adapt quickly enough risk a competitive disadvantage, whilst those overly keen to embrace it need to ensure they understand the inherent risks in the technology and are attuned to the regulatory requirements and ethical considerations that flow from it.
Understanding AI's capabilities and limitations in the context of a specific business is critical, and key in informing the scale and pace at which the company should move. Companies are well placed to navigate these considerations where they foster a culture of lightweight R&D amongst their own people, including by investing in AI literacy at all levels of the organisation right up to the board.
Responding to emerging risks
Given the potential for emerging risks to evolve quickly and unpredictably, including those outlined above, managing these issues presents a formidable challenge, especially when directors and management are already grappling with significant responsibilities.
With this in mind, we have seen companies position themselves to succeed when they do the following:
Prioritise the information flowing to directors and streamline the issues they are being asked to consider and the decisions they are required to make. Information should be presented clearly and succinctly, so that directors can be confident they are getting the right information to make decisions and allocating their time appropriately across different issues.
A management structure with clear allocation of responsibilities provides confidence that risks—including new ones—will be identified at the appropriate level and that they will be escalated and addressed as necessary. A good management structure is one which is explicit and transparent in its decision-making processes. It avoids relying on a leap of faith in the sufficiency of general policies and routine processes to adequately address more nuanced issues.
Emerging risks can be highly complex and, by their very nature, involve new frontiers in dealing with issues that may be non-core or unfamiliar to the business. This underscores the importance of ongoing training programs and educational sessions for the board geared towards emerging risks and refreshing newer skills like digital and technology literacy. At the management level, it is necessary to consider the appropriateness of organisational structures and reporting lines to ensure they account for emerging risks. This could involve investing in personnel with expertise in particular areas of increasing prominence, such as cybersecurity and geopolitical strategy, who are equipped to execute strategy in practice, day to day.
What's next?
Managing risk well can create opportunities as strategies and decisions play out in the global corporate landscape. We can expect all stakeholders—including regulators—to continue to keep a close eye on how Australian companies fare in 2025.
The significance and complexity of a company's emerging risk profile may be a daunting prospect to think about in abstract, but being informed and proactive are important early steps in identifying and managing these issues. When focusing on risks, it is instinctive to focus on possible downsides—however, the other side of the coin is the enormous opportunities that can be realised when strategies and decisions allow the company to effectively navigate these challenges.