Against a backdrop of severe economic volatility, the need for businesses to control and manage risk has never been greater.
With recovery continuing at such a sluggish pace, the stakes are high and the cost of getting it wrong can be enormous. The recent horsemeat scandal is an example. What started in January as an update on meat product authenticity by the Food Safety Authority in Ireland, resulted in frozen burger sales crashing by 43 per cent in UK supermarkets by the end of February, according to Kantar Worldpanel.
The scandal subsequently forced most of the UK’s supermarkets into the costly exercise of removing and testing their processed meat products. That episode served as a timely reminder for large firms that business risk is increasingly something which must be factored into everyday work.
“It is not simply the job of one person or office to consider the risk,” says Amanda Blanc, chief executive of insurers AXA UK. “It is the responsibility of everyone at executive and management level. Corporate structures are often slowed down considerably by operational silos but, despite the fact risk management is vital to the health of the business, it cannot be allowed to take precedent. Likewise, it cannot be relegated to a tick-box exercise as it will lose any authority.”
Remuneration incentives are key to embedding risk management in the staff psyche
FTSE 350 companies disclosed on average 11.3 risks in 2012, up from an average of 11.0 the previous year, according to a corporate governance review carried out by Grant Thornton.
The accountancy firm found detailed descriptions of principal risks and uncertainties are now being provided by 85 per cent of FTSE companies, compared to 74 per cent in 2011, which would indicate the risk management issue is being taken more seriously by large firms.
With awareness rising, Stefano Tranquillo, vice president for Northern Europe at FM Global, says firms must focus on internal training to ensure risk management is entrenched in the minds of all employees.
“One way to do this is to make sure risk management is included within the reward element,” he says. “Often blame is accorded when something has gone wrong, but managers should find a way to value and measure the risk management process, and reward accordingly.”
In recent years, incidents such as the oil spill in the Gulf of Mexico, which hit BP, and the furore over the failure of G4S to fulfil its Olympics contract, have demonstrated how quickly problems stemming from risk can escalate for big companies.
In both cases the problems became almost unmanageable despite both firms having strong governance at the top, proving that experienced management is no guarantee against the effect of risk.
Keeping tabs on suppliers, logistics, price fluctuations, customer perceptions and spending habits are also becoming more important. And, even though globalisation has provided opportunities for international businesses to source goods and services at lower prices, it has also increased the risk factors.
Mr Tranquillo says all businesses should look at internal systems that encourage learning, while risk managers should engage staff in a process of “what would happen if…?” and consider a series of worst-case scenarios.
Meanwhile, Ben Willmott, head of public policy at the Chartered Institute of Personnel and Development, suggests remuneration incentives are key to embedding risk management in the staff psyche.
“Effective reward strategies will make it clear that managing risk is more than a box-ticking exercise. Poor reward strategies that reward or incentivise inappropriate behaviour or risk-taking are a real problem,” he says.