Forewarned is forearmed

With the challenges that we face in the industry, risk management and reassessing your appetite for risk is becoming a key function for companies within the industry.

This has become pertinent in our industry and for foreign companies who want to expand into our markets. The issue of risk management was discussed at an event organised by the Institute of Risk Management South Africa.

Dancing in the dark

One of the companies within South Africa that has had to embrace risk management is Eskom , who has struggled to live up to its commitments to customers over the past five years.

When dealing with risk, Lwazi Mbele – Chief Adviser of Enterprise Risk Management at Eskom – averred that from as early as 2010, the company was already showing a certain measure of reluctance towards its existing risk appetite. “There was no doubt that the way we were approaching risk was inappropriate and that change was needed,” said Mbele.

Mbele said at the time, the management viewed the issue of risk appetite as a solution without a problem.

Shifting gears

This changed in 2013 when Eskom changed gears and looked at how the company measured and approached risk. This was because the company found that it had high risks on its register, but it was not moving forward in safeguarding these risks. “Because of this, the Eskom board placed a greater focus on safeguarding and assurance regarding risk management,” said Mbele.

Mbele adds that the problem with risk management is that there is no standard or universal risk appetite statement that applies to all organisations. Companies need to look at the risks that they face and then adjust their management activities appropriately. “It is about defining risk along set guidelines and then implementing a plan to achieve these guidelines,” said Mbele.

Mbele said that what Eskom has learned through this process is that companies need to develop a risk appetite and then make sure that it is seen to. “Companies need to tweak actions to react to specific challenges. Specific actions in the risk appetite process will speak to specific actions which will need to be taken,” said Mbele. Finally, assessing where the risk will sit after treatment is also a key function,” said Mbele.

Quantitative risk management

One of the reasons that the German national football team is one of the most successful teams in the world is that they go about their business with clinical efficiency and ruthlessness. There are no super star players in that team; it’s just that that as a unit, the team operates like a well-oiled machine.

Francois van Dyk, Senior Risk Consultant at Marsh, said that a similar approach needs to be taken by companies when dealing with risk. 

“By dealing with risk timeously and appropriately, companies can achieve greater capital efficiency with an overall decrease in downside protection. It will give them a competitive advantage with a smarter and faster response time,” said Van Dyk.

Reaping the benefits

There are significant benefits associated with a quantitative approach to risk management. “A wide range of key decision makers benefit from risk adjusted planning and a detailed understanding of the risks faced by the company. Best practice enterprise risk management can also be used to support strategic investment decision making and capital allocation in order to optimise capital expenditure execution,” said Van Dyk.

He added that the company’s willingness to take risk needs to balance margin growth potential against the company’s ability to absorb shortfalls in performance. This is not an easy decision to make and could take time to quantify.  

“A clearly defined and agreed upon risk appetite statement is the basis for transparent decision making and informs limit setting within the organisation. This is a key document and needs to be formulated.  Doing this at a good pace involves a risk pyramid which provides a structured view of key risk categories, specific risks and their drivers,” said Van Dyk.

Editor’s Thoughts:
Developing a risk management strategy is different for every business. But it is important as forewarned is forearmed. If you want to survive in a market driven by risk, you need to do so with your eyes open. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.