Government has a profound impact, positive and negative, on the operations and activity of all organisations. The outsized influence of government on every day issues and long term strategic matters creates uncertainty across all sectors including corporate, non-profits and the public sector itself.
Government risk is the collective sense of the political, regulatory, reputational and conduct, compliance, operational and opportunity risk created through the unknown future actions or inaction of government. As a regulator, policy setter, funding partner or driver of reform, government creates uncertainty in a range of ways. This can include everything from political risk issues such as impending elections and the potential for holistic change of policy direction through to more nuanced matters such as tweaks to regulatory or funding priorities. Understanding government risk is core to the ability of an organisation to deliver on its mission.
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry is an example how government risk manifests. Early in the process the major industry players were of the view they could tough it out despite years of growing tension because of a combination of hubris and a lack of appreciation of the risks in play. In hindsight it is easy to see how the tarnished reputation of the sector was bound to lead to government intervention, but the heightened political and media momentum drove not only an inquiry and major reform but a severe government response which has had an extraordinary impact on the financial services sector in Australia (for the better most would argue).
Indicators of government risk categories can be a challenge to capture and measure as by their nature they do not lend themselves to be easily defined or weighted under a traditional risk register approach. But the intertwined issues that create government risk can be separated and the risks managed through a strong and consistent framework and FPL have developed a methodology to systematically capture the range of risk factors at play for an organisation or project operating in an Australian domestic context. We group these factors into external risks, where government decisions impact on an organisation, and internal risks, where the actions of an organisation change their relationship with government.
A key driver of external uncertainty is political risk and in this domestic context is focussed on matters of change and uncertainty such as electoral cycles, government stability and other localised political events, as opposed to major geo-political risk factors (whilst present, these are considered beyond the scope of this domestically focussed government risk approach due to their universality). Other risk categories include regulatory risk where a change in policy creates new conditions on operations (such as packaging or promotion restrictions) and operational risk where government decisions disrupt business inputs (such as energy policy settings) required for normal business operations. Although sometimes related, regulatory and operational risks usually manifest independently of any political risk factor and can be harder to predict without strong visibility of government policy settings or relationships with government.
While there may be relatively little opportunity to effect change or impact on these broader external risks, they can be managed through appropriate assessment and preparation for change. The areas where organisations can effect most change in their government risk profile is through the management of factors contributing to their standing with government and to set themselves apart (in a good way) from the rest of their sector.
Poor corporate behaviour in public can result in reputational and conduct risk which can erode an organisation’s ‘licence to operate’ and hamper an ability to engage either directly with government stakeholders or with third party stakeholders. Similarly, compliance risk is created through failure to address or enforce critical compliance criteria which could trigger an escalated government response. Finally, a significant but often overlooked risk for many organisations is opportunity risk, which manifests when there is limited organisation wide visibility of government stakeholders, relationships, institutions or policy settings which means the organisation is unable to realise opportunities that may be available. These risks also have corresponding upsides: exceptional public profile, squeaky clean compliance and an active and dedicated approach to understanding and engaging with government opportunities can lead to an organisation being seen as a sound partner of government and being brought, in appropriate ways, inside the tent on government decision-making.
Government risk poses challenges to organisations at every level. Approaching it in a holistic and methodical way, as opposed to being isolated as a communications or compliance matter, activates new areas of risk management across an organisation and can create greater engagement with the risk management process. But this requires tools that allow organisations to cross a new frontier in consolidating management of risk, stakeholder and government engagement and corporate affairs and is not without complication and complexity.
The expectations of leaders in these areas to be ‘all seeing and all knowing’ will only increase as awareness of the need to manage risk organisation-wide grows. This creates challenges but also opportunities for those in leadership positions to harness the momentum towards better management of government risk and position their organisation ahead of the curve.
Steve Cusworth is the Managing Director at FPL Advisory.
FPL Advisory is a team of specialists resolving risks and creating opportunities with respect to government. We work with public sector and corporate clients to execute strategies for owning and managing change.