June 2015 Issue
In recent years, particularly since the stymieing effects of the global financial crisis took hold, risk management has been a dominant topic in the corporate boardroom.
There are myriad potential problems that companies can experience, from suppliers or contractors experiencing financial difficulty to natural disasters and everything in-between. Situations can turn sour overnight, so companies must deftly negotiate their way through this risky corporate landscape.
Risk management is an important tool that has risen up the ranks of the C-suite. In an increasingly tighter regulatory environment, and with smaller margins for success, risk has moved to the fore. However, there is still something of a dichotomy here. Today’s business leaders are under greater pressure to respond to shifting degrees and types of risks, while providing ever more data and feedback to regulatory bodies and shareholders. At the same time, to achieve their global and regional objectives, companies need to embrace some level of risk.
As a result, it is crucial that firms get their relationship with risk right from the C-suite down. Taking and managing risk effectively can be a great generator of growth. However, mismanaging risk can have a hugely detrimental effect on firms, eliminating any potential competitive advantage they may have over rivals.
For a number of years, risk did not command the attention it deserved. There was a feeling in certain quarters that placing too much emphasis on risk could slow a company down. But opinions are changing. A new report from PwC, ‘Risk in review: Decoding uncertainty, delivering value’, suggests that companies that focus on risk management generate better growth and increased profit margins. The report surveyed more than 1200 senior executives and board members and found that, over the past three years, 55 percent of risk management leaders recorded increased profit margins and 41 percent achieved an annual profit margin of more than 10 percent by placing greater importance on risk management processes.
“Companies that focus on risk management generate better growth and increased profit margins.”
“Risks are increasing dramatically and executives are constantly faced with making decisions to protect their businesses, while also trying to improve their financial performance,” said Dean Simone, leader of PwC’s US Risk Assurance practice. “By integrating risk management into the business life cycle, these two objectives can easily come together to work in unison. Developing an effective strategy requires investment, but the payoff and competitive advantage can be enormous.”
But despite the increased profit potential of firms that respond appropriately to the risk environment, many firms are failing to put in place the desired processes and structures needed to elevate them to the level of the most prominent risk management leaders. Only 12 percent of the firms surveyed have shown a willingness to instigate improved risk management schemes. It would appear that some firms are perhaps clinging to the idea that implementing risk management policies can hamper performance, when in reality the opposite may be true. Firms willing and able to put robust risk management structures in place are more likely to make informed and balanced judgements. Companies that focus proactively on risk management can, in the long run, improve their bottom line. Firms that have championed risk management processes and linked business risks with their overall corporate strategy have been better placed to achieve an annual profit margin of greater than 10 percent over the past three years, according to the report.
Risk management leaders distinguish themselves in a number of ways. Firstly, they understand how risks interconnect and impact business. According to the report, 70 percent of risk management leaders are able to understand how risks interconnect, while only 23 percent of non-leaders understand these same connections. Risk managers are also more likely to form an aggregated view of risks when making business decisions. This enables them to arrive at a clear and realistic understanding of operational issues and market opportunities. Further, risk management leaders have a better strategic understanding of their company’s risk appetites and are willing to take risks non-risk managers would traditionally avoid. Around 90 percent of risk leaders surveyed are increasingly willing to take a risk-enabled approach to growth. A similar amount of risk management leaders also noted that their approaches to risk are aligned with their firm’s strategic planning processes; just 36 percent of non-risk managers could say the same.
Clearly, attitudes towards risk are shifting. While there will always be some degree of trepidation around risk and the potential negatives that companies can suffer, those that can link their risk management processes to their business and strategic planning have the potential to greatly improve their growth levels.
© Financier Worldwide
BY
Richard Summerfield