Risk management in troubled times

2008-11-12 00:00

Rapid developments in technology, globalisation, financial instruments and other risk drivers have increased both the volume and complexity of risks facing organisations today.

As entities grow, so too do stakeholder expectations that senior executives and board members identify, understand and manage all material risk exposures across the organisation.

The exposure financial services firms in the U.S. had in the sub-prime credit crisis can be attributed largely to conscious strategic decisions that were made made without a proper understanding of the inherent risks these instruments carried.

South Africa’s own recent price-fixing scandals, involving some of our most prestigious companies, occurred without the apparent knowledge of senior executives.

In response to this, and increased governance pressures, many organisations have embraced an enterprise-wide risk management (ERM) approach to view risks holistically across an organisation.

Unfortunately, strategic and operational risk in many organisations are still managed in silos or as part of an annual compliance exercise to update their registers.

An ERM approach, in contrast, seeks to assess the interactive effect of various risks across an organisation’s risk universe, with the aim of balancing stakeholder appetite or tolerance for risk.

The underlying premise driving ERM is that risks and strategy are aligned.

As part of the decision-making process, various strategic alternatives are usually considered, which set the entity’s appetite for risk against potential rewards.

Once the most beneficial strategic choice is made, an ERM process requires management to identify and monitor the implementation of appropriate risk responses to ensure intended objectives are achieved.

Implementing sophisticated risk management frameworks and systems does not require a significant investment.

One could leverage off existing infrastructure, such as:

• Using existing performance measurement systems or scorecards to drive and align behaviours with the organisation’s short- and long-term objectives, or

• Including key risk indicators in the management reporting process as a tool to monitor changes in risk levels or patterns.

The problem for many decision-makers is the inability to balance risks emanating from the various spheres of their business.

This may, for instance, require the safety of employees to be played up against the risk of losing a key client.

An ERM approach to risk management aims to put a variety of risks on the same platform.

This allows management to focus its attention and resources on risks that most threaten the achievement of strategic objectives.

As a consequence, ERM becomes integral to the strategic planning and performance assessment process of organisations.

Colin Bouwer

Manager: Risk Advisory Services

KPMG Services (Pty) Ltd

031 327 6000

colin.bouwer@kpmg.co.za

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