Risk management: A board issue yet? Lloyd's study finds increased interest at the board level, more progress is needed By Michael J. Moody, MBA, ARM
For a variety of reasons, risk management has been gaining the attention of many corporate executives. Everyone from the finance and human relations departments to the CEO are concerned about risks. But the big question today is: What is the perception of risk management at the board level? Subsequent to the passage of the Sarbanes-Oxley Act of 2002 (SOX), many people have tried to determine the acceptance of risk management at the board level. Late last year, Lloyd’s of London and the Economist Intelligence Unit, the world’s foremost provider of country, industry and management analysis, jointly undertook one of the most comprehensive studies on this matter. The study, “Taking Risk on Board; How Global Business Leaders View Risk,” surveyed board members from 112 companies from around the world about how their organizations managed risks. The survey results provide an important view of risk management and how it fits into the overall strategic business plans of a variety of international companies. And while the largest industry segment represented was financial services (23%), other industry groups also were well represented. These included professional services, health care, pharmaceuticals, construction, real estate and general manufacturing. Recognition of the problem Financial failures around the globe have taken their toll on corporations and their shareholders. Enron, WorldCom, and a long list of others have shown just how vulnerable corporations can be to the issues of risk. Thus the implementation of regulations such as SOX and other country-specific laws have placed an increased obligation on corporations to properly identify, assess and manage risks. And for some time now, many experts believed that corporate boards were beginning to take risks seriously. However, this is one of the first international surveys to confirm that concern on the board’s part. The survey points out just how far the topic of risk has risen on the board’s agenda. According to the results, three years ago only one in ten boards spent more than 10% of their time on formal risk management. Today, however, that percentage is almost 40% and is continuing to grow. Further, the number of boards that spent more that 20% of their time on risk-related issues is even more dramatic. Three years ago, less that 3% spent more than 20% on risk management, but today this figure has increased to over 13%. Additional evidence of the board’s recognition of the importance of this issue is the fact that directors now also see this issue in relationship to a much broader array of risks. The increasing scope of risk in which boards are interested now encompasses regulatory risk and governance risks. Another risk that has been gaining importance is the disruptions to business continuity associated with dominant individual risks. Also gaining visibility are country-specific risks, due in large part to the increasing importance of international operations. Reality check Most respondents agreed that the first and most important step in the risk management process is to determine what an organization’s appetite for risk is. Many believed that this determination should be made by the board, especially in the financial services sector where half of the respondents said it was the board’s responsibility “to be provocative in determining the organization’s level of appetite for risk.” For all industries, the percentage was 28%. The study points out that the interest among industrial firms has been prompted by the success of the financial services industry in approaching risk in a scientific manner. By measuring the likelihood of certain risks and weighing the need and cost of mitigating those risks, financial service firms have been able to determine the “value at risk.” This measurement is important to boards because, the study notes, “first, it gives them valuable data that they can digest as often as they need and, second, it provides a vital focus for debate between the board and a company’s risk officer or risk committee.” This begs the question: Is all of this attention resulting in fewer losses? As it turns out, according to the survey, over the past 12 months one in five companies had suffered at least one significant loss due to a failure to properly manage risk. But of even more concern, more than 50% of the survey respondents had one near miss due to a failure to manage risk. And over 10% of the respondents admitted to at least three near misses over the past 12 months. These numbers would indicate that while boards are paying more attention to risk management, they still have not determined how best to mitigate those risks. Risk management headed to the top Organizationally, companies have chosen a variety of methods of managing their risks. Over 50% of the respondents have chosen to centralize risk management over the entire organization. In these cases, the risk management effort is overseen by the board as part of its overall business strategy. And ultimate responsibility for risk management has clearly moved up the corporate ladder. More than 54% of those surveyed said that CEOs had primary responsibility for risk management at their organizations. An additional 44% indicated that their board, including non-executive members, filled a similar role for their organizations. But despite these favorable trends, risk management has yet to be embedded in most firms’ long-term strategic business plans. Respondents cited a variety of reasons for not completely embedding risk management in their strategic management process, the leading one being that other priorities took precedence. Also noted was a fear of creating a risk-averse culture that could impede normal business operations. Yet another frequently cited reason was the lack of cost-effective risk management tools. One respondent noted that his company’s chief risk officer had effectively encouraged board involvement by relating the impact of each of a wide range of risks to the company’s bottom-line performance. The study says that “relating risk management to the company’s profitability in this way not only helps to focus the minds of the company’s directors and senior officers on the hazards they face; it also ensures that the process of identifying and mitigating risk remains relevant to the company’s day-to-day business.” Unfortunately, the study found that “the connection between coordinated risk management and higher profits has yet to be made for a majority of senior executives.” Only 25% of the respondents to the survey indicated that shareholder value had improved as a result of the board taking greater responsibility for risk management. Golden opportunity As noted above, the importance of risk management continues to grow as organizations of all sizes begin to embrace an expanded vision of the risk management concept. This trend provides a unique opportunity for those agents and brokers that can see the value of adding these services to their repertoire. For years, mid-sized agents and brokers have been providing their clients with many of the activities that would normally be performed by a full-time risk manager. While most of these agents and brokers have done a yeoman’s job in filling this role, they can greatly enhance this relationship by promoting a more integrated approach to risk management. The Lloyd’s survey confirms that this approach is now taking root, as many large corporations have already appointed senior level managers to the role of chief risk officer. Agents and brokers that can move their agencies to one that better relates risk to their customers’ profitability will be able to set the stage for significant growth—growth that is more in concert with their customers’ long-term strategic business plans. This is the kind of approach that can move an agent or broker out of the annual insurance renewal process and on to becoming an indispensable member of their customers’ trusted advisors. Forward-looking agents and brokers will not want to squander this opportunity. Conclusion |
||
|
