ERM - A roadmap for identifying risks

03 August 2006 Cathly Findley PR

An increased focus on financial disclosure, reporting and compliance has resulted in numerous segments of the business community expressing interest in Enterprise Risk Management (ERM).

Organisations are coming under pressure to report risks in a forward-looking context and to strengthen their risk disclosure capabilities for market and credit analysts, as well as stakeholders. ERM is effectively a roadmap for identifying and reducing risks, and one of its major benefits include transparency for investors and rating agencies.

Directors or boards of companies listed on stock exchanges are now seeking out expertise in risk management processes and it is expected that senior management of non-listed companies will follow suit, says Guy Scott, CEO of Risk Services for Aon South Africa. Aon is a leading provider of risk management services, insurance and reinsurance brokerage, human capital and management consulting, and specialty insurance broking.

The ERM process provides a framework for meeting financial disclosure requirements covering critical risk areas and promotes better decision-making. It also enhances the capital allocation process and creates formal link between operational, financial and strategic decision making within an organisation.

However, the implementation of ERM is faced with some challenges. Commonly cited obstacles include an inability to demonstrate immediate quantifiable returns on investment, the amount of time and resources required, cultural incompatibilities, inadequate information technology systems and inadequate senior level support.

ERM processes must have a champion inside an organisation to be successful, and these individuals have typically been Chief Financial Officers or members of boards committees, says Scott.

Increasingly the Institute of Risk Management South Africa (IRMSA) is playing an important role in assisting in the implementation of an ERM process. It has established a Code of Practice to assist businesses to implement risk management processes and is based on the 2002 King II Report on Corporate Governance.

According to Scott, South African corporate entities range in their sophistication and formalisation of ERM. A large percentage of the JSE listed companies and the larger public sector entities are well versed and formalised in ERM many of these entities employ Chief Risk Officers who report directly to their boards on ERM.

There are, however, instances of flagrant disregard and abuse of power, resulting in fraud and tax evasion which is frequently reported on in the media, he says.

Smaller enterprises, which dont endure pressure from regulatory scrutiny, external shareholders, analysts, etc., lack sophistication in the ERM process and many still have not implemented sound formalized practices.

How prepared are businesses in managing the risks of an invisible threat?
asks Scott. Given that scientists agree that the pandemic influenza threat is a question of when, not if, directors could be accused of dereliction of duty if they fail to safeguard their business, staff and shareholders against this threat.

Changes in the insurance market's perception of risk in recent years means that, outside the life assurance and sickness markets, there is often very limited or no protection against many of the risks, which come with a pandemic. Cover for loss of business is a particular problem, which currently leaves business continuity management as the first and only line of defense.

Aon South Africa, which has access to vast resources through its global parent company, is in a position to implement an effective ERM process, says Scott. We offer traditional solutions such as placing insurance, arranging risk financing or providing consulting solutions. However, some of our recommendations may be behavioral in nature where a traditional solution will not suffice.

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