Thursday, 28 June 2012
ERM holds key to unlocking bottom line potential of risk management
Risk managers and their organisations must change the way they look at risk from a governance, risk and compliance (GRC) perspective to an enterprise-wide approach in order to drive opportunity, innovation and growth, participants of World Risk Day were told this week.
In a rallying call to risk professionals across the world, Loren Padelford, Executive Vice President and General Manager, Active Risk, who put together the Virtual Summit speaker programme for the event, said that enterprise risk management (ERM) can bring about tangible and measurable benefits for organisations and is a competitive differentiator. Risk managers must drive this message home if they are to make the most of the opportunity currently afforded them by the state of the global economy, he added.
However, Mr Padelford warned that studies show there is still a way to go before the majority of risk management programmes reach the maturity level needed to accomplish such goals.
“For effective risk management within organisations, in this economy, we have to change the way we think about risk. It now needs to be about performance and goal achievement—the pendulum has swung. This is no longer about governance, risk and compliance,” said Mr Padelford in his webinar entitled How Taking Smarter Risks Will Add Value and Drive Growth.
The American said that companies and their risk managers currently face a ‘perfect storm’ that provides a ‘perfect opportunity’ for risk professionals to prove they can add value to business.
The financial crisis has led to budget cuts with a focus on doing more with less, he explained. Companies are also dealing with increased stakeholder pressure, exponential data growth that makes it hard for organisations to figure out what is relevant to them and increased regulatory demands are all conspiring to create that perfect storm, he continued.
“Everyone wants growth and to achieve goals, but we have to be able to do that in light of all of the other things that are swirling around. So there is a huge amount of risk, but with risk comes reward. So how you take smart risks is key,” said the ERM expert.
However, he warned that most organisations still take a silo approach to risk management that does not facilitate the strategic risk management needed to make the best risk decisions.
He pointed to a recent study of over 1400 corporations worldwide by the Committee of Sponsoring Organizations (COSO) that found that 80% of companies rank between ‘immature’ and ‘somewhat mature’ in terms of their risk management capabilities.
“So 80% of the market was below the maturity threshold for risk management and that is the opportunity,” said Mr Padelford. “The real questions are how do we move up this curve and then what does moving up this curve mean [for business]?” he added.
“There is continued evidence that by focusing on risk management and turning risk management from a compliance process to a strategic business imperative—and driver of performance—companies experience real world tangible improvements,” he said in part answer to his questions.
The better you manage risk the less surprises you will face, he gave as an example. Better risk management also results in a reduction in losses, more control over supply chain, improvements in product and programme delivery, lower costs associated with insurance and lower information technology costs, he continued.
And crucially, effective strategy-focused enterprise risk management delivers real market orientated benefits, argued the organiser of the summit.
Mr Padelford drew on research from Ernst & Young that suggests companies ranked in the top 20% in terms of the maturity of their risk management capabilities drive up to three times as much earnings before interest and taxes (EBIT) than their lesser ranked competitors.
He also cited a study by PwC that found that those companies in the top quartile for risk management integration are given a two times price to book multiple by market participants. “These are real tangible benefits and this is what happens when organisations take risk management to the next level,” enthused the ERM expert.
“Managing risk effectively, managing it in an enterprise way, drives real value. It drives growth because it gives you more confidence, it allows your stakeholders to believe in you more and it leads to capital markets and better insurance rates. It gives you competitive differentiations so you win more business and improves corporate reputation…This all leads to direct bottom line growth—that three times EBIT number,” argued Mr Padelford. Best practice risk management equals business success, he added.
Ensuring ERM best practice is not as complicated as many people think, continued Mr Padelford. It is about the whole organisations, from the chairman of the board to frontline employees, asking themselves core questions about risk. What are risks to goals and strategy? What controls do we have in place? Are those controls effective?
“The quicker you get everyone to do this the better you will be at managing risks and making better decisions. The better you understand risk the more healthy an organisation becomes. And remember everyone is a risk manager,” he said.
Ensuring strong board and senior management support for risk management, focusing on the things that impact upon goals, objectives and strategy and developing practical and effective policies and procedures are key to full ERM implementation, experts at World Risk Day’s Virtual Summit told participants.
As are driving risk management as an everyday activity, providing effective tools to support the risk process and a focus on goals not stages of implementation, they added.
Risk managers must speak the language of the board and top management to drive the risk management agenda and deliver the bottom line growth that companies desire, speakers at the online summit advised.
To achieve this risk managers must speak in a language that excites management with a focus on the benefits of risk management, said Mr Padelford.
“The executive team speaks a different language to the risk management team. I have presented a number of statistics and market driven analysis that is the language of executive teams. EBIT, price to book, enterprise value and reduction in costs—these are the things that they want to talk about,” he explained.
“So the risk management industry has to translate its day-to-day vocabulary about risks, mitigation and controls into the vocabulary of the boardroom, which is growth, execution and costs—all of the financial metrics that prove whether or not you are valuable to the market. When we start to make that shift and say ‘I can inform decisions, I can drive strategy and ensure we achieve our objectives’ the executive team and the board will start talking,” he added.
The inaugural World Risk Day, which took place on Tuesday, was a worldwide event that focused on sharing global ERM best practices. The fundamental differences between GRC and ERM and how effective ERM can help drive opportunity, innovation and growth was the concept at the heart of the event.
Its Virtual Summit featured webinars from over 20 expert speakers, with 12 live presentations and a range of on-demand content.
With over 1,200 registrations for the webinars, topics ranged from governance and management lessons from the financial crisis to the importance of organisational risk culture and the connection between enterprise risk, business continuity and insurance.
Its organisers plan to make it an annual event to ensure that dialogue around strategic risk management continues.
To access its on-demand content, which includes recordings of all the webinars, please go to http://worldriskday.com.