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Saturday, 20th April 2024 |
| Risk management needs proper attention in Irish firms |
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| New technology and regulation means more opportunities to implement effective risk management. Charlie Barry outlines the benefits of risk management and suggests an implementation plan for CFOs. |
Factors including foreign exchange risk or disaster mean that senior executives need to be familiar with the concept of risk management. It is a term that is becoming increasingly important and now garners much more attention from CEO’s and CFO’s than before, with many larger companies even appointing a chief risk officer (CRO) to manage all risks faced by the company.
Despite this, a recent survey and report carried out by the European Business Forum (EBF) in association with Marsh, suggested that many businesses are unconsciously increasing their exposure to risk through gaps in their risk management policies.
The EBF report on managing risk set out to discover whether the perception of a riskier global business environment was matched by the actual reality in modern business life and management. The results showed that while new technologies have created the potential for heightened global risk, these same technologies have also provided the means by which to better understand and manage that risk. The European wide survey also showed that senior executives from companies as diverse as Nokia, Siemens, Turin Olympic Committee and Zurich Financial recognised that risk management techniques have the power to deliver competitive advantages.
Additionally the report espoused the view that increased regulation, rather than intensifying pressure on companies, can actually enhance the competitiveness of organisations so that for the first time, regulation has become a positive tool. The result is that positive, compliant companies will now find it easier to attract new capital and good employees, and create successful relationships. This in turn translates to competitive advantages for those progressive companies that have adopted appropriate risk management techniques.
In Ireland, risk management needs to develop a much higher profile in business and management thinking in line with international thought, especially considering the insurance climate in Ireland. The failure by Irish firms to keep up to date with best practice in risk management will lead to business failures as unanticipated episodes affect firms with weak risk controls.
An increased level of attention to risk management and an improved risk profile will lead to benefits in insurance negotiations and improved competitive positioning. By developing a greater understanding of risk and adopting appropriate strategies, progressive companies can create competitive advantage. Additionally, with a widening number of risk transfer alternatives and improved risk analysis methods, businesses of almost any size can benefit from opportunities once considered only viable for much larger companies.
In Ireland, companies that can demonstrate their implementation of a better risk management programme or adherence to approved standards are in a stronger position to negotiate better insurance deals both in the long and short term. At a time when insurance has become a pivotal issue, it is incumbent on senior executives to manage risk to the best of their ability by using internal or external experts. While some companies have explored the option of using lobby groups such as the Alliance for insurance reform, such moves alone and taken in isolation may not have the desired impact. Some Irish companies have actually gone much further and explored the options available to them with regard to captive insurance arrangements or taking on greater levels of self-protection and taking ownership of the overall risk management process.
So what should Irish businesses do? To help businesses bring good risk management practices into their organisations Marsh Ireland suggests a ten-point plan for improved risk management in Irish businesses.
1. Establish a common understanding of risk in your organisation - your organisation should categorise the risks it faces in order to make its subsequent management decisions easier. This could be according to whether the risks are strategic / hazard / operational / financial.
2. Understand the main drivers to managing risk - is your organisation intent on managing risk to control costs or is it for stakeholder assurance or other governance issues?
3. Agree responsibility for risk management in your organisation - to truly benefit from risk management strategies you must provide evidence that your organisation takes risk management seriously, in the form of executive sponsorship and ownership and buy-in from all staff.
4. Identify key risks - to manage risk you must know what it is. The risk identification process should encompass a holistic view of the organisation and include such issues as:
- Strategy risk - corporate governance, political risks, acquisitions/divestments, market share, share price;
- Operational risk - supply chain, employee retention/attraction;
- Hazard risk - property, liability, health & safety compliance, employment protection;
- Financial risk - economy, pricing fluctuations, supply costs.
5. Assess the likelihood and severity of risks and the threshold of your organisation - set risk tolerance thresholds - how much risk is your organisation prepared to take? What would be catastrophic? What would the triggers be for a major risk to impact on your organisation?
6. Allocate management controls to remaining key risks e.g. a risk register, safety systems, support documentation - where possible, introduce mitigation measures to reduce the likelihood of the risk eventuating - e.g. install a sprinkler system in your warehouse, implement effective internal audit to avoid fraud.
7. Transfer key risks using insurance and alternative risk transfer methods such as captives and other financial methods - your organisation may wish to consider alternative risk transfer and financing solutions, which often qualify you for additional financial benefits. Examples of Alternative Risk Transfer vehicles include setting up your own captive insurance company.
8. Establish reporting lines for key risks while streamlining the process of risk reporting - integrate risk management protocols into existing management structures to create more immediate buy-in.
9. Measure and monitor the on-going risk improvement.
10. Communicate your success to the board, stakeholders and shareholders as well as insurance providers.
Controlling risk is one of the most effective and potentially financially rewarding improvements that a business can make in the current climate. There is also every good chance that your competitors are already being advised to take this on board by their insurers and FDs too. |
Charlie Barry is the risk management practice leader of Marsh in Dublin.
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| Article appeared in the September 2003 issue.
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