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The Dimensions of Risk Management

By Michael Vincent

26 December, 2006

What will distinguish a successful company from a failure in the future?  The old ways of the last century are no longer acceptable; the focus of shareholder value is an old measure of success that has run its day.  Unfortunately most of the large companies in existence today have not realised this yet and continue on the pathway to future destruction. The attitude of financial markets reinforces this delusion.

 

It is true that the shareholders are the owners and have their capital or investment at risk within the firm, but they are only one of the stakeholders and a successful business will be one that survives into the future and adds long-term wealth to its shareholders and extreme value to its stakeholders.

 

Who are stakeholders, these are other interested parties within the orbit of the firm and can consist of the following as listed in AS/NZS4360: 1999:

 

a. Employees, management, senior management and volunteersb. Decision-makersc. Business or commercial counterpartiesd. Employee groupse. Union groupsf. Financial institutionsg. Insurance organisationsh. Regulators and other government organisationsi. Politiciansj. Non-government organisations such as environmental groups and public interest groupsk. Customersl. Suppliers, service providers and contractorsm. The median. Individualso. Local communitiesp. Society as a whole.

 

Plus in addition

 

q.         Shareholders

 

We only have to look at the traditional role of the board and CEO, that is short- term focus and short-term wealth creation.  This leads to an acceptable market capitalisation and a good report from the stock exchange that has little to do with the real value of the firm or its survival into the future. 

 

Here is the emerging role of the risk manager, that of a long-term view and the need for the preservation of wealth or value.  The future is now and it is one of the old getting smaller and less successful and the new growth firms getting bigger and stronger.  This is demonstrated by the increased merger activity amongst the top end that is not increasing value but rather preserving current valuations into the future.  It could be argued that we are entering a new business era of generational shift and the creation of the new age corporate entity; the old survive by buying market share at a long term cost.

 

The large corporations will be judged in the future by their commitment to the addition of value to the stakeholders, I believe that most fail the simplest of tests now and that shareholders need to be wary of their investment into the future as it is the mix of relationships amongst stakeholders that really generate long term wealth creation.  In the future investors are going to be required to take a longer-term view of the value of investment 

 

The finance industry, rightly or wrongly in Australia is a prime example, branch closures, increased fees, the perceived arrogance of management and its ability to reject the urgings of government all militate against stakeholder value for the short term value of the shareholder but this is simply not sustainable in the current business environment.  We are seeing a backlash building, the financial institutions that can balance shareholder and stakeholder value will be the survivor, the other will be the victims in the future business environment.  Other examples are the retail industry and the oil industry.

 

Business needs to sit down and look who are its stakeholders and how to add value to all.  The risk manger needs to be at the leading edge of this process to guarantee the chance of survival and wealth preservation.

 

Next month, finally we can get to the last of the seven "S".

 

 

 

 

About the Authors

Director,

Australasian Risk Management Unit,

Faculty of Business and Economics,

Monash University

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