The markets have rebounded dramatically from their nadir but the economy remains in a delicate position. The opportunities are out there but banks have yet to loosen their grip on funds. It’s this vicious circle of cyclonic gloom that executives and risk managers are still faced with, a full two years after the financial meltdown of 2008.
The dilemma for CEOs is that the potential is there to make great strides in this climate, but the inherent caution in decision making right now means that opportunities are routinely being missed. This is where risk managers start to justify their salaries…
“All businesses take risks,” explains John Blackwell of risk management giants Atradius. “If they didn’t technology, innovation, and motivation would disappear. It is the willingness to take risks that drives the economy and gets many of us out of bed in the morning.”
Rather than taking your foot off the gas, Blackwell suggests another, more diligent approach: “One of the most important things a business can do right now is to limit risk is to pay close attention to details and avoid the urge to take undue risks simply to try and stimulate profit growth.”
Of course, there is one strong dynamic at the moment: it’s a buyer’s market – providing a CEO has the necessary funds are in place to seal the deal.
“Buyers can make overt rather than covert inquiries to assess the risk and credibility of a seller or someone providing a service or product,” says Tom Hartley, regional managing director of Kroll Consulting Services.
Blackwell backs this sentiment up:
“Preparation and insurance are two of the best ways of ensuring the risks don’t consume us. By preparation I mean doing our homework so that we know and understand what the risks are. This includes checking out buyers, industry market conditions, the local and global economic environment, and what the potential impact on our business would be if things go wrong.”
The business comparison to Newton’s Law of Physics comes into play here. It’s important he says to understand the equal and opposite reactions, in order to plan for both best and worst case scenarios. “Companies should have forward looking assessments on strategy and deliverability,” says Paul Taylor, director of risk assurance at Morgan Crucible.
Before the crisis, companies didn’t consider the downside risk in the upturn – now the opposite is true. Businesses who don’t take the risks will miss the opportunity, but wider caution spread across the market can bring it to a grind halt.
The Financial Reporting Council introduced changes to the UK Corporate Governance Code over the summer as a preventative measure. Formerly known as the Combined Code, the aim is to help company boards become more effective and more accountable to their shareholders.
The code aims to clarify the board’s responsibilities relating to risk, and also recommends the importance of ensuring that board members have suitable skills and experience. It also recommends that all directors of FTSE 350 companies be put up for re-election every year.
Before the crisis, companies didn’t consider the downside risk in the upturn – now the opposite is true.
“The Code is highly influential in shaping the approach to governance by organisations not only amongst its target audience of UK listed companies but also on a wider basis,” says Steve Fowler, Chief Executive of Institute of Risk Management.
“The IRM argued that explicit requirements should be included in the Code in respect of risk management and we are very pleased to see this reflected in the new Code.
Risk management has set the boardroom agenda since the 2008 crash, and it doesn’t seem like that will change anytime soon. The only difference will be in the forward-thinking strategies that systematically set themselves a risk appetite, Blackwell believes:
“It is the nature of the business – as it’s been repeatedly demonstrated over the years. The drive for profit improvement will gradually drive businesses to take escalating risks. Hope is only lost if we let setbacks prevent us from moving forward.
Although we can’t always completely protect ourselves from unexpected setbacks, we can usually implement innovate products and processes and continue to find ways of meeting the needs of the markets.