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Risk management and the bottom line

12 December 2007 Ernst & Young

Managing risk is an essential and central responsibility of every company director. Risk is also an implied reality, regardless of business type; it is how businesses manage these risks which contributes to their long term performance and profitability. Despite this reality, many South African companies today have an inadequate risk management function which not only leaves them in a potentially precarious position, as they cannot manage risk easily. Ultimately, this could result in a material impact on their bottom line.

That’s according to Trevor Rorbye, director for Risk and Advisory Services at professional services company Ernst & Young, who says most companies which do not effectively manage risk might not suffer a spectacular demise, but are likely to deliver reduced performance and sub-optimal returns. “While it is easy to point to company failures as examples of those businesses which didn’t have sufficient risk management controls in place, the reality for shareholders is that there are many companies which are operating acceptably without appropriate risk management controls in place,” he says.

While such businesses may be profitable and even appear sustainable, the reality, says Rorbye, is that they may not be in a position to maintain that sustainability if unmitigated risk comes home to roost. “Unless all important risks are understood and strategies are in place to weather these risks should they come to bear, these businesses might find themselves unexpectedly in hot water,” he says.

More than that, Rorbye points out that shareholders may not be enjoying the full benefit of their investments in companies where risk management is not assigned appropriate attention. “Complete failure is not the only consequence of insufficient attention to risk. Less than optimal performance and lost profits are likely to result,” he says.

Rorbye believes South African businesses are prone to insufficient risk management as a consequence of the dearth of appropriately qualified and experienced directors.

This is not only the result of the problem of individuals holding more directorships than to which they realistically can apply their minds. “In addition to this scenario which does arise, risk management as a discipline and a subject is also a relatively new concept. Because it has not been taught as such in universities, many of the older directors have not been formally versed in the discipline,” says Rorbye.

As such, he believes board composition should include a specialist risk management designation, potentially in the hands of a younger director.

Some business are aware of shortcomings in their risk management regime, yet do very little to address them. “It’s an issue of perception. Directors tasked with risk management and mitigation may accept that investing in appropriate measures and structures is a sound principle, yet don’t believe that making such investments will deliver practical improvements in company performance,” Rorbye says.

However, he believes that spending appropriately on risk management can deliver performance improvements which have an overall improvement on the bottom line. “A full and through analysis of the realities which face a business and which present risk is necessary to inform an appropriate risk posture, in terms of which the company is equipped not only to be more resilient but also more profitable,” he concludes.

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