Improved communications on risk management can create value

Companies have the opportunity to enhance their value by improving their communications on risk with investors, says Ernst & Young, one of the world's leading professional services organisations.

Improving communications with investors may reduce the risk premium they impose in the face of unclear or incomplete information about a companys risk management.

The new report, Managing Risk Stakeholder perspectives, compares the findings of a series of global research surveys conducted by Ernst & Young among three key stakeholder groups: investors, senior executives, and independent board members. More than 700 senior decision makers from across the globe were interviewed in three separate studies conducted over the last twelve months.  

Jim Holstein, Global Leader of Ernst & Youngs Risk Advisory Services, comments, "Successful risk management is an integral part of an organisations strategy and operations. Companies that perform well on risk also tend to communicate better with all their stakeholders, both internal and external. But surprisingly, companies and boards do not rate external communication on risk management as highly important and so they may be missing a golden opportunity to create more value in the eyes of their investors."

Three of the top four risk management factors having the greatest impact on business success relate in some way to good internal communication.

These top three factors are:
        Having a risk culture embedded in the organisation.
        Educating people about the importance of understanding risk and their related risk management capabilities.
        Giving the board regular, transparent and robust information about risk.

High performers are four times more likely than low performers to have a risk-aware culture and to educate their people on the importance of risk. Of those organizations managing risk well, 59% are very confident in the information provided to their boards, compared with just 16% of low-performing companies.

Thiru Pillay, Director, Risk Advisory Services: Business Risk Services at Ernst & Young, says the drive around enterprise risk management (ERM) has been accepted at various levels in different businesses in South Africa. "The financial sector has approached enterprise risk management with vigour given that it is bound by legislation to effectively mitigate risk. In the public sector, the Public Finance Management Act, No.1 of 1999 continues to be a driver of risk management, but this is nothing new since this legislation has been around for a while now with differing levels of success across the public sector."

Pillay says most local public companies have some level of ERM, but he stresses that these initiatives are only as good as the people who are running them. "Where an ERM strategy is accepted and absorbed across the business, and extends beyond merely covering financial risk, it contributes value to the company which can be seen, in some cases, in the share price. Investors have more confidence in companies with a vigorous approach to risk management," he continues.

"In the field we are finding that the approach of South African companies in terms of risk culture and awareness has grown in past years and is comparable with global trends. Companies with a mature ERM approach will not have high risk materialisation and are resilient to risk; These companies typically enjoy share prices which outperform their competitors," Pillay adds.

However, the report shows that a third of companies (31%) have no policy on communicating on risk with major investors and other external stakeholders. Investors are seeking transparency on risk, in terms of both information and management approach. Yet while investors receive a considerable amount of information, very little is specific to risk management; investors are looking for confidence based on competence and trust.

Holstein adds, "Boards are very concerned about potential risk failures and top performing companies are prepared to make the necessary investments to reduce the likelihood of future negative risk events."