Effective Corporate Governance: A Tool for Managing Risk and Economic Uncertainty

Prevailing economic uncertainty has given the global business landscape a rough ride in recent years. Major headlines highlighting this fact barely miss a week — interest rate hikes, rampant recession, companies announcing layoffs. These signs of turbulence are hard to miss. Sadly, this uncertainty seems more prevalent for organisations operating in African markets, such as Nigeria, as they continue to navigate an extremely challenging environment. Insecurity, corruption, fluctuating commodity prices, currency volatility, rapidly changing policies, the influence of global trade tensions, and other disruptors such as global entities exiting the market have created this challenging climate.

Even with some positives, like the African Development Bank (AfDB) disclosing that Africa dominates the list of the world’s 20 fastest-growing economies in 2024, with strong growth expected in regions like West Africa, the overall economic situation remains challenging. The World Bank estimates that Sub-Saharan Africa’s economic growth has plummeted to 2.5% in 2023, significantly lower than previous years.

In such a time as this, one of the crucial approaches organisations can employ to survive and thrive is Effective risk management. Effective risk management is a key part of good corporate governance, helping companies stay steady during tough times and remain resilient in the long run. To manage risk, one must first understand the risks. This leads to an important question: What are the key risks we face with the current economic uncertainty?

What are the Risks Associated with Economic Uncertainty?

When economies face uncertainty, businesses confront many risks that impede growth, erode profitability, and jeopardise their existence. These risks include:

• Financial risks: include increased borrowing costs, scarcity of funding, potential defaults, and currency fluctuations.
• Operational risks: Supply chain disruptions, cybersecurity, labour shortages, changes in consumer behaviour.
• Strategic risks: Difficulty forecasting future trends, missed opportunities, and potential for competitors to gain an advantage.

As previously stated, these risks are heightened in pan-African markets, where pre-existing factors frequently compound economic volatility. This increases African-based businesses’ need to implement effective risk management strategies to mitigate potential threats and capitalise on emerging opportunities.

The Role of Corporate Governance in Risk Management

Effective corporate governance equips organisations with the tools to navigate economic uncertainty proactively and responsibly. One of the essential aspects is strong board oversight, as the board sets the tone for risk management by ensuring proper frameworks and policies are in place. They must also foster a risk-aware culture throughout the organisation, embedding risk management into decision-making processes at all levels.

To achieve this, boards must:

• Define Risk Appetite: Clearly defining the organisation’s risk appetite — the level of risk it is willing to accept in pursuit of its objectives — provides a crucial guide for decision-making.
• Implement Robust Processes: Establishing robust risk identification, assessment, and monitoring processes enables the organisation to proactively identify and evaluate potential threats, as well as emerging opportunities.
• Embed Risk Management: Integrating risk management into all aspects of the business engenders an approach that ensures risks are managed holistically across different functions and operations.
• Ensure Transparent Reporting: Transparent risk reporting and communication, internally and externally, keeps stakeholders informed about risks, mitigation strategies, and the organisation’s overall risk profile.
• Design Proactive Risk Strategies: Proactive risk management strategies like scenario planning, stress-testing business models, diversifying revenue streams, and developing contingency plans to anticipate and prepare for different economic possibilities.
• Financial Prudence and Agility: Maintaining strong cash reserves, diversifying investments, managing debt levels, and cultivating flexibility and agility to adapt strategies swiftly, seizing opportunities and mitigating threats amidst changing market conditions as they emerge.

How Organisations Have Thrived Amid Economic Uncertainty

In the face of economic uncertainty, African organisations have shown impressive resilience and adaptability. Guaranty Trust Bank (GTBank) in Nigeria stands out as a prime example, successfully navigating challenges in one of Africa’s largest economies.

As the COVID-19 lockdowns presented significant operational challenges, GTBank swiftly shifted to remote work and greatly improved its digital services. This led to a notable increase in mobile app transactions, demonstrating GTBank’s robust digital infrastructure, adaptability, and innovative approach.

This was made possible thanks to the bank’s long-term digital transformation strategy. During Nigeria’s 2016 recession, the bank introduced the innovative *737# USSD banking service, enabling customers to conduct transactions using basic mobile phones. This initiative not only broadened financial inclusion but also lowered operational costs, enabling the bank to remain profitable despite economic challenges.

Interestingly, you might have assumed everything would conclude with the pandemic, yet GTBank continues to lead in digital innovation post-covid. The bank has enhanced its digital offerings with advanced virtual banking options and AI-driven customer support.

This digital-first strategy has been crucial in strengthening customer satisfaction, cutting costs, and building resilience against economic shocks. By consistently staying ahead in digital innovation, GTBank has solidified its position as a leader in Nigeria’s banking sector, ready to face future challenges and seize new opportunities.

Conclusion

The highlighted example is just one instance among many organisations in African nations thriving amidst economic uncertainty. Nonetheless, in the dynamic African economic landscape, uncertainty remains a constant.

By adopting proactive risk identification, scenario planning, financial prudence, agility, and transparent communication, businesses can strengthen their capacity to mitigate threats, seize opportunities, and generate sustainable value for stakeholders. As the saying goes, “Smooth seas never made a skilled sailor.” With thorough and adept risk management and strong corporate governance, organisations can navigate uncertain economic times, emerging stronger and better equipped for future challenges.

Chioma Mordi

CEO

About The Society for Corporate Governance Nigeria

SCGN is a registered not-for-profit organisation committed to the development of corporate governance best practices in Nigeria. Today, the Society is the foremost institution committed to the development and promotion of corporate governance best practices in Nigeria.