RISK MANAGEMENT PRACTICES STILL INADEQUATE

Almost two-thirds of executives at global companies with revenues of more than US$1 billion ($1.1 billion) consider their firms’ risk management practices to be inadequate, despite significant investments in improving their risk management capabilities since the advent of the global financial crisis.

A recent study found that, even with their renewed focus on managing risk, most companies still fail to take information about emerging risks into account.

“I’m surprised at how little progress has been made. So many companies have worked to improve their risk management practices since the financial crisis started,” said Alex Wittenberg, partner at global consulting firm Oliver Wyman, which conducted the study in conjunction with The Financial Times.

“Yet many of the current approaches to managing emerging risks are not providing companies with the business information they need, leaving many vulnerable to a wide range of potential sudden shocks.”

Emerging risks are defined as both new risks, such as this year’s eruption of volcanic ash in Iceland, and familiar risks in unfamiliar conditions, as when volatile commodity prices suddenly become some of the largest costs for businesses such as airlines and consumer products manufacturers.

That general lack of progress is especially troubling given that 71 per cent of executives view global recession as the greatest risk to their business, according to the study of 650 senior executives.

It pointed to a number of reasons for the serious disconnect between companies’ approaches to assessing risks and effectively using the information to make better decisions, including the fact that many boards of directors receive emerging risk information only infrequently.

Furthermore, many executives rely on basic, “static” risk analytics and tools rather than multidimensional approaches that take advantage of a wide range of outside data.

To illustrate, only half of executives surveyed integrate emerging risk information into their strategic planning process.

The study also found that immediate and pressing financial events have pushed risks not directly related to their business, such as climate change or pandemics, off most executives’ radar screens.

Source: Risk Magazine / September 2010 Issue

Posted by: Maricel Medina, MSM