Make risk work for your business

While the majority of South African company directors view business risks in a negative light, those who perceive the opportunity inherent within these business risks stand to benefit handsomely.

That’s the assertion of Trevor Rorbye, director for Risk and Advisory Services at Ernst & Young. He notes that the irrevocably linked concepts of risk and reward put those companies with an appetite for carefully managed risk in a position to price appropriately and take higher profits.

“There are several cases in point, probably the most prominent of which is Investec’s engagement with JCI Limited. Given the fact that its bailout of this company was fraught with risk, Investec was able to charge a considerable premium for the advance of its services,” Rorbye says.

He points out that risk is an integral and essential element of doing business which is encountered by every company. Noting that a sound risk management regime, particularly in publicly owned organisations, is an attribute for which shareholders are prepared to pay a premium, Rorbye says that quite logically, better managed risk means reduction of the possibility of loss.

A 2002 McKinsey report has proven that this is the case, with companies demonstrating that sound risk and corporate governance can command up to a 22% higher share price. From a corporate perspective, risk often comes down to a question of what the company is prepared to pay to earn a premium.

While this finding may appear to fly in the face of those businesses which have a demonstrable appetite for risk, Rorbye says it remains possible to command a share price premium by adapting their posture to manage these risks.

“Even where risk is higher, a disciplined approach will extract value. Such an approach depends on thorough examination of the climate and environment in which the risk is to be assumed and the deployment of appropriate strategies which can turn risk into reward,” he says.

Rorbye notes that such strategies can in fact be the basis on which a successful enterprise is built. The introduction of innovative methods or techniques which serve to mitigate previously untenable risks can define or underscore the company value proposition.

Examples of such businesses include operators in the financial services sector, such as those in the micro loans environment, corporate finance (like Investec), organisations that buy ‘bad debt’ and seek to recover monies owing and the furniture retail sector.

“These businesses have demonstrated the positive results that can be achieved through sound risk management practices to risk. Empowered by strong risk management, they have entered markets where others fear to tread and have, in many cases, enjoyed significant rewards,” says Rorbye.

He believes there is a valuable lesson which other organisations can take out of these successes. “Rather than risk avoidance, some companies make a business of clearly understanding the parameters of risk and then being aggressive around it to achieve above-average profits. Good risk management in effect, can deliver the opportunity for differentiation by equipping a company to go with confidence where others might fear to tread.”