Diligent risk

Is risk management – or the lack thereof – the Grim Reaper for your business?

Part 1: Failure in sustainability

To elaborate on the previous article, it is essential that cognisance must be taken of the following paragraph:

“In conclusion, corporate governance must be evaluated as a one corner stone of sustainability
and a related risk assessment basis on both sustainability and governance will ensure that the organisation has a holistic risk profile against which it can measure its performance on a continuous basis in the drive to sustainability.”

It seems peculiar that the assessment of modern Corporate Governance has developed an almost unnatural view of risk oversight of corporate governance as it is mainly situated exclusively in the hands of the internal and external auditors. The total concept of a holistic view on the risk of an organisation is centralised in the hands of a small silo and the other activities are mostly discarded.

The question is why?

Monitoring, interpretation of monitoring results and action to mitigate any abnormalities are the core of any risk profile in an organisation. The question must be asked:” Why do organisations fail in sustainability”?

1. No or incomplete measurements indicators
Meaningful indicators and, not only financial indicators must be developed for an organisation that can be monitored on a regular basis and the system must be developed in such a way that it is understandable and easy to control and be implemented as a management tool.

2. Invalid indicators.
Indicators are to validate data. Indicators must be specific and easy to interpret.

3. Mistaking legal accountability for corporate effectiveness
Legal registers and policies are specific for specific legal requirements and do not address effective governance nor taking the cash flow of an organisation into account.

4. Self-reporting and self-selection bias
People from top to bottom become biased and reporting becomes a “paper exercise” without any meaning. While, if indicators are objectively developed from a sensible risk methodology, bias can be minimised in a self-reporting system reflected in the risk profile.

5. Silo building
Silo building in any organisation is the downfall of governance. People in an organisation, which specialise in one or other field, do not see the holistic picture and for this reason there are no interactions or flows of information between departments nor the effect of the risk in one department on the risk profile in another department

6. Build confidence of investment community and stakeholders:
Executives fail to inform stakeholders. As institutional investors, rating agencies and regulators talk more about the importance of risk management in their assessments of companies, management may be requested to disclose and comment on the organization’s capabilities for understanding and managing risk to enable stakeholders to make informal assessments as to whether returns are adequate in relation to the risks undertaken.

As companies increase the transparency of their risks and risk management capabilities and improve the maturity of their capabilities around managing critical risks, management will be able to articulate more effectively how well they are handling existing and emerging issues.

The question must be answered is risk an evil or not?  (To be continued…)