Smartening up

Many organisations are still managing the fallout from the downturn while also searching for signs of sustainable success. But the ability to learn from previous mistakes and anticipate new threats, assess and act, is as critical a part of management’s responsibilities as it has ever been.

Ernst & Young canvassed the views of more than 70 business executives and analysts representing 14 industry sectors, the resultant Business Risk Radar presents a snapshot of the top 10 risks organisation are facing across the globe.

The report provides content for reflecting on the top risks facing your organisation, but maybe even more importantly for challenging how smart your risk management capability is (See Table opposite) for guiding you through these uncertain times.

But organisations have always faced significant risks, even before the financial crisis, and this begs the question, why is smart risk management so important today, when surely we have passed through the eye of the storm and the most severe risks are behind us. Well, there are a number of factors which are keeping risk high on the corporate agenda.

Firstly, as already mentioned, businesses are emerging from two very turbulent years, perhaps without resolution on why they suffered or what they can do to avoid suffering again. This has been closely followed in the UK by a General Election and one of the most eagerly awaited Budgets in recent history, and it is now apparent that the resulting policy decisions are defining a new chapter for our economy and a much changed business environment.

Secondly, whilst this uncertain next chapter has the potential to provide fresh opportunities and chances for growth, these will be accompanied by risks, some familiar, some more unusual, and so some difficult choices. For instance, how will organisations manage a slow pace of economic recovery aggravated by the potential ripple effect of public sector cuts on the wider economy and the stifling inertia brought about by fear of a double dip recession.

There are signs that these choices are causing frustration for stakeholders (shareholders, financiers, staff) who may now feel that they are no longer aligned with the level of risk that executive management want to take to return to profitable growth. Early symptoms may be private discord and a drop in productivity, but this can escalate to open disagreements and derailed strategic initiatives.

And finally, regulators have reacted to the financial crisis by subtly, but significantly, emphasising more explicitly the risk management requirements of the Board and the C-suite for determining the acceptable level of risk. For some, greater involvement and commitment from the top may now be needed.

To help themselves, all parties affected should consider a ‘smarter’ approach to risk management and be prepared to answer three fundamental questions, in the context of this new business and regulatory environment.

These are:

What are the right risks: do we know our ‘significant’ risks? Are we taking and managing the right risks? The EY Business Risk Report can act as a reference point.

What is the right amount of risk: do we know how much risk we can/ should take? Have we determined our risk appetite/ tolerance, the acceptable level of risk taking? Revised corporate governance requirements are restating the Board’s responsibility for determining the extent of risks they are willing to take.

What are the right early warnings: do we know how to monitor our risk exposure? Can we measure and get early warning of any unacceptable risk exposure, impending damage? Wouldn’t this help too?

As organisations seek to gain opportunity out of the recent adversity and the resultant new world order, a re-appraisal of risks, risk appetites and smart risk management capability should help them to be more alert and flexible than their competition. It can also give firmer foundations for exploiting their business model, a clearer picture of the potholes and roadblocks ahead for their business plan and facilitate a shared view between key stakeholders as to the right level of risk taking/ management required to deliver the strategic objectives and the desired level of reward.

Few of the risks that hit businesses recently, or that could resurface in the near future, were unpredictable. Reflect on your risks and then challenge how smart your risk taking, management and monitoring capability actually is.

Michael Morley-Fletcher is a director at Ernst & Young's risk team
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