Ten ways to manage corporate risk

CEO Middle East gives you ten ways to manage your regional corporate risk so that you are aware of the potential pitfalls, and that you can grow and successfully embrace globalisation.

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By  James Bennett Published  April 13, 2006

|~||~||~|Risk is a word synonymous to the majority of boardrooms in the Middle East and across the globe, and if it isn’t, it should be. The risks involved in running a business in the region in the 21st century are manifold and, as business becomes more complex and more globalised, and companies go in search of new customers, the risks are rapidly increasing by on a daily basis. According to accountants PricewaterhouseCoopers’ ninth annual global CEO survey, 64% of chief executives cite over regulation, 63% trade barriers/protectionism, 57% political instability and social issues and 48% terrorism as the major risks and the principal barriers to globalisation and expansion. Globalisation, however, is a must in today’s business world and the Middle East is emerging as a serious contender in several major markets. These include real estate, construction and property development, Islamic banking, leisure and retail and logistics as well as a large chunk of the world’s ports. But along with growth, opportunity and expansion comes risk, an issue that all companies, both local and international have to seriously consider, envision and hedge against if they are to succeed in making a mark on the global marketplace. And with risk must come a series of robust and carefully planned and predicted risk management strategies. As the region is emerging on the world scene, risk management is only just being codified by companies in the Middle East, but what several businesses are suddenly realising is that it can provide a framework for CEOs and management teams to deal effectively with uncertainty, and the risks and opportunities associated with uncertainty, in order to enhance value. Although CEOs today tend to be optimistic about globalisation, what economic risks affect you and your company and how embedded is formal risk management in your businesses? Every business is different and there is no status quo on how to embed risk strategy, but asking the right questions can often spark the right answers and lead to positive structural and operational changes. CEO Middle East gives you ten ways to manage your regional corporate risk so that you are aware of the potential pitfalls, and that you can grow and successfully embrace globalisation.||**|||~||~||~|1 Examine the macro level The first port of call when assessing risk is to ask a series of general questions on a macro-economic basis. What global economic factors and what impact does the global economy have on your business? How do oil prices, interest rates, fluctuating currency values, excessive regulation, political instability and terrorism affect your business, for example? Which areas of your business do these issues affect? What management strategies are you using to respond to global economic conditions? What are your short-term (one-year) expectations for revenue growth and profitability, what are your expectations for revenue growth over the long-term (three years) and how can these risks affect those forward-looking prospects? Amin Habib, head of corporate banking at Barclays retail and commercial banking in the Middle East, says there are three forms of risk that apply to all businesses including credit, market and operational risk. In basic terms, risk identification, risk assessment processes, agreed patterns of response, risk controls, risk monitoring, and regulatory compliance processes should all be embedded in the organisation. On a positive note PwC’s survey revealed that CEOs worldwide are decisively reworking their companies to ensure stability and performance, and are generally optimistic about the results of their efforts. 2 Examine the industry level Once you have examined the wider impacts, narrow these down to your particular sector. Based on macro-economic factors, what levels of performance do you expect to see? Take into account shock factors that could take place such as a spike in oil prices, a natural disaster or a potential act of terrorism and examine the level of vulnerability and sustainability your sector has. Look at competition in your sector. PwC discovered that 14% and 46% of global CEOs regard the threat of competition as a major and significant risk. 3 Examine the micro level You have assessed the global and macro scenarios as well as the sector risks, now drill down even further into your specific business and core company risks. Ask yourself what critical success factors your business has to differentiate itself from the competition. Does it have what it takes? Dissect your portfolio and look at the risks you are leaving yourself open to, for example, in the property sector who are your clients? Are you simply focusing on the residential market or do you also cater for the commercial sector and, if so, what risks are you being left open to if one of these markets takes an unexpected hit? Do you have the measures in place or a back up plan to cope with a sudden downturn? Other major risk factors to consider include stock market volatility, the threat of global terrorism, over-regulation, currency fluctuations, reputational risk, corporate governance issues, price deflation, emerging technologies, loss of key talent and cost of capital. Loss of talent, for instance, can be a major worry. Financial services companies, for example, are under intense pressure to deploy winning strategies and to retain top talent in order to remain ahead of the game. PwC found that 11% and 34% of global CEOs view loss of talent as a major and significant risk respectively. 4 Management review The success of an effective risk management process lies largely with the senior management of the company, but the board itself must also undergo a rigorous risk assessment process and question themselves. What are the management’s strengths and weaknesses? What capabilities does the management have to deal with risk? Is the board adequately equipped and does it have the right skills and qualities to deal with varying degrees of risk? 5 Connected thinking Although the majority of the future investment and general company decisions are taken by the senior management, the risk management process should be a ‘top-down’ approach. Connected thinking, such as sending the risk management message from the board downwards throughout the whole company, should be the way forward. If the message is measured and controlled across the whole business, not just in the boardroom, employees gain a sense of where the business is going and external parties and customers gain a sense of transparency and openness. If a business’s risk message is cascaded down by informing the entire company of its actions then this can only serve as a positive tool to enhance its reputation.||**|||~||~||~|6 Independent board members/external auditors/non executive director(s) “An internal view can often be blind to the risks and dangers being faced by a business,” says Barclays’ Habib. He suggests that external experts, such as external auditors or employing a well-known business figurehead as a non-executive director to work outside the core business but who has a well-rounded business sense, can “add strength and knowledge to a company making it aware of risk areas that it wasn’t immediately aware of in the first place.” He adds that their impartiality, skills and ability to not be internally focused can greatly help a business. 7 Corporate governance Often criticised for its lack of mature and well-established corporate governance rules, companies in the region are having to quickly adapt and comply with international standards and focus on regulatory compliance. Banks, for example, have to adhere to Basel II, a piece of regulation aimed at producing uniformity in the way financial institutions and banking regulators approach risk management across national borders. As an emerging global force, the region is in an era of new regulatory changes, as opposed to the US and Europe that have seen re-regulation, and, as many CEOs see it, over-regulation. In the US, for example, an underlying and nearly unnoticed corporate permissiveness led to business failures on a massive scale – such as Enron and WorldCom – that hurt many investors and employees, diminishing investor confidence in the lack of corporate transparency. Increasing compliance, however, such as Sarbanes Oxley, has improved the situation and will almost certainly affect Middle Eastern companies in the near future. And you should be prepared for that. Whether this is seen as excessive is another matter but a large majority of companies in the US, for example, would now rather adhere to Sarbox than face the wrath of the regulators. 8 Risk advisory services A risk management framework alongside a raft of new perspectives on best practice are vital additions to management and CEO knowledge, but many dimensions are left unexplored as often the focus can be too internal. If you have the budget to invest in expert advice do so. Take the time to search for a risk advisory firm that is best suited to your needs. The Big Four accountancy and risk advisory firms, for example, may charge the highest fees but can offer the most solid and well-respected risk management business advice there is. 9 Use the correct and most appropriate risk advisory model Many large organisations already have risk management models in place, having developed in-house systems as the years go by. It isn’t essential to follow but their example can help to guide you. If in doubt, establish contact with a local bank, for example, and ask how they have achieved such high risk management standards. If that isn’t the solution for you, an off-the-shelf risk management tool could do the trick. 10 Finger on the pulse As a CEO you should have your finger on the pulse of every risk entwined and connected with your business and the sector(s) you operate in. How you interplay and how comfortable you are with the risks involved within your company is crucial to your business’s future success.||**||

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