A majority of corporate executives have reported a need to overhaul their approach to risk management. Mark Phillips reports.
NEW YORK: An overwhelming majority (85 per cent) of corporate executives have conceded they need to overhaul their approach to risk management if the lessons of the economic crisis are to be used to improve business results, according to a new study by Accenture.
The 2009 Global Risk Management Study - based on responses from 260 chief financial officers, chief risk officers and other executives with risk management responsibilities at large companies in 21 countries - also found that 40 per cent said their companies already have increased or will increase their investments in broader risk management capabilities in the next six months. Nearly another third (31 per cent) said their companies are currently considering increasing their future investment in such capabilities.
The analysis pointed to a lack of integration of current risk management and performance management processes. While nearly half the respondents said their company's risk management function is involved to a great extent in strategic planning (48 per cent) or in investment and divestment decisions (45 per cent), only 27 per cent said it was involved to a great extent in objective-setting and performance management.
"Executives could improve their organisation's performance and position themselves for economic recovery by linking and balancing risk management and performance management to aid their decision-making and increase shareholder returns," said Accenture Finance and Performance Management practice managing director Dan London. "Being effective at this also requires companies to integrate their risk management capabilities enterprise-wide."
Respondents identified a number of common problems with their risk management functions, including:
* Ineffective integration of risk, return and capital issues in decision-making (85 per cent);
* Lack of alignment between the company's strategies and its risk appetite (85 per cent);
* Insufficient enterprise-wide risk culture (82 per cent);
* Inadequate availability of timely risk, finance and business data (80 per cent);
* Lack of integration and aggregation across all risk types (78 per cent); and
* Ambiguous risk responsibilities between corporate and business units (78 per cent).
However, executives also identified the benefits they anticipate as a result of addressing their companies' risk management shortcomings. For example, while nearly three-quarters (72 per cent) said their companies' risk management function has a significant impact on their ability to comply with regulations, nearly two-thirds (61 per cent) said the same about its impact on the company's ability to sustain profitability, and 58 per cent said risk management has a big impact on its ability to manage liquidity and cashflow.
Further, the study found that broader and better integrated risk management capability can have a variety of impacts on companies, including: ability to achieve competitive advantage (cited by 53 per cent of respondents); reputation with the public and media (53 per cent); rating agency ratings (53 per cent); ability to secure positive analyst commentary (50 per cent); and ability to reduce cost of capital (47 per cent).
"The current economic downturn is the ultimate stress test of a company's risk management function, and the lessons learned can be leveraged to restore confidence and create a stronger, better integrated and aligned platform for improving performance under a variety of business conditions," London said. "Leading companies recognise that an expanded, integrated risk management program supported by technology that allows management to monitor risk management-related factors across a company is not just a protective tool - but one that can provide companies with a competitive edge in a constantly changing world."
The study also found that companies expect new risk-related challenges as a result of the current economic environment, including more stringent regulations and increasing costs associated with growing complexity in the risk environment. For instance, 41 per cent of respondents reported their risk management costs had increased by at least 25 per cent in the last three years, while 14 per cent cited a 50 per cent rise.
Asked to identify the biggest challenges they face over the next two years as they develop more rigorous risk management capabilities, respondents pointed to difficulty aligning with the overall business strategy (93 per cent); need for more effective collaboration with business units (89 per cent); need for greater integration in the firm's processes and culture (89 per cent); and inadequate resources and talent (88 per cent).