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The Dimensions of Risk Management - Trends and developments for the future

By Michael Vincent

26 December, 2006

The term "Risk Management" was first coined in the USA in the mid fifties and used to drive constructive change in management behaviour.  It fell in to disuse in the sixties and seventies and was largely kept alive by the insurance industry.  The last ten years have seen the resurgence of the concept of risk management.  In the future the cry for risk management will only get bigger.  Why is this so?

 

I believe risk identification and management are becoming increasingly important because of the need for Directors and Officers to comply with legislation, this requirement to comply is an increasing phenomenon both here and overseas with large penalties applied for non-compliance.

 

In the United Kingdom a process was started with the publication of the Cadbury Report. The Turnbull Report that has resulted in sweeping change to the way companies are managed followed Cadbury; both reports have driven change to listing rules at the stock exchange.  We are very lucky in that we have a standard for risk management, 4360:1999, as a business sector more usage of the standard is essential for long term survival of Australian business.

 

What are the benefits of risk management to a company?  It is only when benefits can be demonstrated effectively that cultural change can happen, punitive measures result in cosmetic compliance not cultural compliance.  Effective risk management results in cultural change and a significant shift in the way business is done.

 

The Institute of Chartered Accountants produced a boardroom briefing that tried to identify the benefits of the process as recommended by Turnbull, these are:

 

1. Greater likelihood of achieving business objectives2. Higher share prices over the long term - added share holder value3. Reduction in management time spent "fire-fighting"4. Increased likelihood of change initiatives being achieved5. More focus internally on doing the right things properly6. Lower cost of capital7. Better basis for strategy setting8. Achievement of competitive advantage9. Fewer sudden shocks and unwelcome surprises10. Early mover into new business areas

 

Risk management works if companies can set clear objectives, it is important that they are expressed around the future and not the past or indeed even the present.   Directors and officers need to continually ask themselves whether the objectives as set will meet the needs for the future to at least an horizon of two to three years.  If this is done effectively then the application of risk management becomes an essential tool for reducing the probability that corporate objectives will be jeopardised by unforeseen events.

 

An attitudinal shift is important for Directors and officers, they must realise the future is here now; they must embrace risk management and not see it as someone else's problem within the structure of the company.  A company that focuses only on internal financial controls is doomed to failure under the emerging paradigm of corporate governance.

 

Ernst and Young have identified the following factors

About the Authors

Director

Australasian Risk Management Unit,

Faculty of Business and Economics,

Monash University

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