Companies failing to get full value from risk mgmt
22 May 2006
Companies investing more in risk management but failing to get full value from it
Despite being more mature in their approach to risk than many overseas counterparts, Australian and New Zealand companies are not yet embedding a risk culture
Australasian companies place a higher priority on risk and manage risk more strategically than companies overseas, but they also face significant challenges in embedding a risk culture, says a new survey from Ernst & Young.
The survey, Companies on Risk: the benefits of alignment, published by professional services firm Ernst & Young, interviewed 54 senior executives about risk in Australia and New Zealand, as part of a global survey of 441 senior decision-makers in large organisations in 16 countries.
Fifty-three percent of local companies see risk as extremely important compared with only 35 percent of the global sample. But the most significant divergence is in strategic approach: 83 percent of Australian and New Zealand companies claim to have a formal process to align risk assessment with corporate strategy, whereas only 56 percent of the overseas companies do.
Ben Palmer, Director of Business Risk at Ernst & Young, said, “The respondents’ high awareness of risk in Australia and New Zealand may in part be attributed to our countries taking an early stand on risk, for example, adopting the Australian/New Zealand Standard AS/NZS: 4360-Risk Management in 1995.”
Companies rate their risk management poorly
In a further divergence, local companies are more likely to have a dedicated risk management function (76 percent compared with 61 percent of offshore companies) and 70 percent employ a Chief Risk Officer, whereas only 55 percent of overseas companies do.
Despite this, and despite the more strategic approach they describe, two-thirds of local organisations surveyed do not rate their overall risk management very highly.
Two-thirds of participants specifically identified lack of an embedded risk culture. And forty-two percent of local companies report that gaps exist in their coverage of key risks, identifying operational risk and technology risk as the major blind spots.
Like their global counterparts, two thirds of Australian and New Zealand companies plan to increase expenditure on risk over the next three years.
Ben Palmer observed: “The survey results confirm the Ernst & Young experience with our own clients: companies see rising levels of risk; they see room for improvement in their approach to risk management; they plan to spend more in this area, and now we are seeing this happen.”
Realising the value
Over the next three to five years, both local and
global companies believe that the continued management of
risk is a key issue, specifically:
- taking a more integrated and systematic approach
- clarifying ownership of risk
- using risk information to develop competitive advantage, and
- embedding a risk culture in the organisation.
The report suggests business leaders need
to leverage what is already in place by:
- Re-evaluating the current risk management approach by asking what the key risks are, what risks are covered and who is managing what?
- Challenging whether adequate formalisation of risk management is already in place
- Assessing the alignment between goals, risks and controls, and focusing on the risks that really matter
- Maintaining and building dialogue with, and across, functions to avoid gaps, overlaps and inconsistencies.
Other findings from the survey of Australian and New Zealand companies include:
- Locally, boards have oversight of risk and the responsibility for monitoring risk sits with the risk officer or business unit head. Globally, the CFO is seen as being responsible for both these areas.
- Local companies believe the board receives appropriate risk information, but are not confident in the capacity of the board to use the information.
- Only one third of companies are very confident they have sufficient resources to deliver the company’s risk management objectives and even fewer believe they receive sufficient support from key personnel in business units, supporting the claim that risk management is not fully embedded.
Coming next: Ernst & Young is now surveying non-executive directors’ attitudes to risk, the final part of its three-stage research on companies’ attitudes to risk.
Further themes within the global report include:
· Companies are not communicating effectively with their investors on risk
- There is a mismatch between investors needs for greater communication on risk and corporate approaches to communication with major investors.
· The changing role of the CEO
- The need to deliver growth for the business while being the primary owner and guardian of risk creates conflicts for the CEO that a greater focus on alignment of risk with strategy can assist.
· Geographic differences in approach to risk management
- There are significant differences between the current status of corporate risk management processes in major geographic locations.
· Positive benefits of risk management
- Risk processes have had a positive effect on working relationships within the management team and wider board, particularly increased effectiveness of decision-making, improved communications and better alignment of efforts.
About the Ernst & Young Risk
To gain insight and contribute to the current debate around risk, Ernst & Young is conducting a series of research surveys in which we explore attitudes to risk and risk management, comparing viewpoints across key stakeholder groups including investors, senior executives, audit committees and other independent board members. Companies on risk: the benefits of alignment, is the second installment of the series. The first, Investors on risk: the need for transparency, is available at www.ey.com/risk/letstalk.
About Ernst & Young
Ernst & Young, a global leader in professional services, is committed to restoring the public’s trust in professional services firms and in the quality of financial reporting. Its 107,000 people in 140 countries pursue the highest levels of integrity, quality, and professionalism in providing a range of sophisticated services centered on our core competencies of auditing, accounting, tax, and transactions. Further information about Ernst & Young and its approach to a variety of business issues can be found at www.ey.com/perspectives. Ernst & Young refers to all the members of the global Ernst & Young organization.