28 November 2022
Is operational resilience the regulatory buzzword of 2022? Definitely maybe. Or should it be corporate bouncebackability? What’s the story and why can it deliver value?
By Ranjeet Sahni, Dymon Asia Capital
Published: 27 June 2022
Operational resilience has been on the forefront of regulators’ minds globally, with a plethora of announcements from the likes of the SEC and NFA in the US, the FCA in the UK, through to the SFC in Hong Kong and the MAS (here and here) in Singapore. In Edition 126 of the AIMA Journal, there were two excellently-written pieces (here and here) that describe what operational resilience means in the eyes of (UK-focused) regulators and how firms should react. A year on, those themes remain applicable globally, so I shall not go into much further depth on those. What I will say is that there are various definitions of what operational resilience means, as there is no single definition but, to me, a better replacement for operational resilience is corporate bouncebackability.1 This is because operational resilience can imply that resilience is solely an operational or technological issue, which is not true – having corporate bouncebackability can be a value-driver too, helping firms to create another avenue of competitive advantage.
Corporate bouncebackability versus risk management
All individuals and firms have had to develop some form of resilience in recent years. A key reason so many global regulators are focusing on this is because they want us, the financial industry, to be better prepared for what will happen in future, to prevent undue consumer harm, maintain market integrity and the ongoing viability of the firms, such as those of you reading this piece work for. I have used the word will deliberately because exogenous shocks will take place. This is an important nuance to recognise vis-à-vis the long-established world of stress and scenario testing in the world of risk management. Stress and scenario testing contain probabilistic elements (if), which bring with them potentially significant uncertainty. However, when thinking about corporate bouncebackability, future disruptive events must be treated as unavoidable (when).
As a simple illustration, there are several overlapping themes in the articles I have already referenced and what global regulators have published:
- IT/cybersecurity – cyberattacks will happen in future, given the ever-increasing sophistication of malicious actors
- Fraud/misconduct – breaches of policy/law/regulations will happen in future, as these are behavioural traits that cannot be eradicated. There is no real-life equivalent of “Ludovico’s Technique” (from “A Clockwork Orange”) that can apply to these kinds of misconduct!
- Financial stability – firms will go out of business in future
- Outsourcing/third-party dependency – some of those firms will be subject to the three bullets listed above. Financial firms are becoming increasingly more reliant on third parties and outsourcing of (critical) functions
So how can corporate bouncebackability provide value?
Initially, it is about firms being prepared for change across all businesses/departments. Being prepared means adopting a more heterogenous approach.
- Having enough and a mixture of sources of financial capital – this is ever more important given the pace and scale of innovation within this industry, which may lead to increases in risk appetite;
- Greater (neuro)diversity amongst leadership to attack different problems in different ways – I have previously discussed that leaders are the pioneers of developing and enhancing a firm’s culture because of their disproportionate impact on the firm. Having leaders with different skills and diverse backgrounds will stand such firms in better stead to problem-solving and devising a suitable strategy for corporate bouncebackability. This is both for the firm itself and for the associated behaviours expected of the firm’s staff; and
- A broader range of businesses/products – e.g., launching a multi-manager, multi-strategy fund (instead of a single manager, single-strategy fund) to reduce that dependency on a single strategy/business initiative.
By adopting such a diversified approach, firms will become more agile and therefore react more positively to change. Also, it means that firms are less likely to be subject to correlated deficiencies across the firm, which, when aggregated, can lead to systemic failure. Having that level of preparation can bring short-term and longer-term benefits to firms.
In the short-term, the value of having corporate bouncebackability allows firms to:
- Dampen and manage the immediate impact of an external shock on their performance better than their peers;and
- Recover their performance quicker than their peers
- Demonstrate the greater extent of their recovery better than their peers – i.e., recover quicker and sustain higher performance for longer.
In the longer-term, having corporate bouncebackability allows firms to:
- Continue to differentiate their offering by demonstrating greater reliability;
- Capitalise on transient opportunities – e.g., winning the “war for talent,” entering new markets/jurisdictions; and
- Increase AUM by appealing to investors who are impressed with their ability to adapt to new circumstances
That last bullet point is arguably the most crucial, as this is where the evidence may be most easily seen. By demonstrating consistently strong corporate bouncebackability (especially during times of exogenous shock), investors may be more willing to redeploy their capital to such firms because of their faith in such firms to not only recover quicker from the initial shock, but also outline a clear long-term plan for continued success built on the firm’s corporate bouncebackability plans.
We cannot expect a let-up on the regulatory front in this area, so firms need to be thinking about this if they have not already. Having a concrete understanding of how to minimize the impact of a disruption to your external stakeholders and the broader economy, knowing where your firm’s weaknesses lie, and developing your foundational elements (such as the four themes I mentioned earlier) will help your firm recover more quickly and provide a platform to emerge from any crisis in a stronger position. As the world begins to open again, it may become easy to forget how we have adapted or to treat this adaptation as temporary in the pursuit of returning to normal but adopting these plans can provide value even after crises have ended.
1 Bouncebackability was allegedly first coined in a sporting context in the world of football (soccer) by Iain Dowie, who was then the football manager of Crystal Palace, when describing the comeback his team had made from contesting a relegation dogfight to getting promoted to the Premier League at the end of that same season (2003-04). For full disclosure and the avoidance of bias, I am a life-long West Bromwich Albion fan (Baggie)!