Changing face of risk management in the UK / Ireland

Wednesday, November 17, 2010 | Posted by: Fiona Cullinan
Categories: Risk | Tags: business, governance, recession, report, survey, risk, strategy, UK, data, business models, risk management, Ireland, appetite, attitudes

Risk appetite statements are a growing trend in the UK, while 84% of surveyed companies in Ireland are changing how they view risk, according to our recent report. Here, two experts from Grant Thornton, review the changing approaches to risk in the UK and Ireland post-recession.

Nearly 400 senior executives in the UK and 69 in the Republic of Ireland were interviewed for A new risk equation, Safeguarding the business model, which researched the success of their risk management processes over the past 18 months – and how they may fare in the future. For more information and to download a free copy, see our post on Risk management: learning from recession mistakes. 

The UK
Sandy Kumar, Head of FS Business Risk Services, Grant Thornton UK, says:

We have seen a renewed interest in developing effective risk systems over the last year. In many cases this has involved a move from a compliance-led risk minimisation approach, often at a detailed process and business unit level, to a more strategic risk function. This process has enabled some companies to improve the effectiveness of their risk function while reducing its cost.

As the economy continues to emerge from the recent downturn, it is those companies with the best risk processes that are best placed to take advantage of opportunities as they arise. They are able to quantify the potential risk and reward arising from specific decisions and improve their strategic decision-making. These companies often have enhanced risk mitigation activities, as management is able to allocate resources more precisely.

Historically, the risk appetite of many companies has not been formally defined and can only be implied through decisions made by the board and management. This is often subjective, inconsistent and not always communicated effectively.

We have noted growing interest in developing risk appetite statements, which set limits on the level of risk that a company is willing to accept.

The best examples are clearly linked to a company’s strategic objectives, include quantifiable measures, have regard to stakeholder expectations and are set by the board and senior management. By defining their risk appetite, companies can improve the quality and consistency of their decision-making and ensure that their strategy is aligned with their desired risk profile.

Ireland
Cian Blackwell, Partner, Business Risk Services, Grant Thornton Ireland:

The impact of the global economic situation on Irish companies has been exacerbated by two specific local factors – the deflating of a significant property bubble, and the financial and reputational damage to the country as a result of governance scandals in a small number of companies, notably Anglo Irish Bank.

Although most Irish companies are surviving the recession – and some are thriving – many of the casualties can be attributed to a failure to manage risk.

Two risks in particular proved to be widely underestimated.

Firstly, that banks which were so eager to lend in the boom times would be so reluctant to do so in the recession, cutting off many companies’ credit entirely; secondly, that property values could plummet, in some cases by over 80%. The latter risk was of particular relevance where so many companies, particularly private and owner-managed companies, couldn’t resist the allure of diversifying into the ‘guaranteed returns’ of the property market.

What we are seeing in the Irish market at the moment is reflected in the survey results, particularly the view that risk management practices prepared companies poorly for the downturn.

However, opinions tend to be divided as to whether that was because the companies themselves implemented poor risk management processes, or whether it points to a general inability of risk management to deal with significant events such as those of the past two years. This latter scepticism has produced some reluctance to invest in risk management, particularly among smaller and medium-sized companies.

The majority of companies are paying more attention to risk management, and are both increasing the resources allocated, and reviewing the approach being taken. This is particularly noticeable among medium to large private companies, which may not previously have been convinced of the benefits of investing in risk management.

Although the survey suggests that the heightened attention may only be temporary, if companies can use this opportunity to review and strengthen their risk functions then the benefits may be long term.

Assess your own risk processes
For a snapshot assessment of your own organisation’s risk processes and effectiveness, complete Grant Thornton’s online Risk Maturity Assessment.The questionnaire consists of just 14 questions and takes no more than 5-10 minutes to complete.

For specialist advice on risk management, please contact Sandy Kumar, Partner & Head of FS Business Risk Services Team, on +44 (0)20 7728 3248, or e-mail sandy.kumar@uk.gt.com. You can also read more about our services on our Business Risk Management page.

You might also find these posts useful:

* How to assess your risk strategy – a checklist
* Perception vs reality of corporate corruption risk (infographic)
* FTSE 350 Corporate Governance Review – in December, we will launch our ninth review highlighting trends in compliance with the UK Code of Corporate Governance and including principal risk reporting. Our report can be used by companies to benchmark performance and inform preparation of annual reports