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Does your company suffer from risk blindness?

Events that bring down or seriously damage otherwise successful companies are normally the result of their boards failing to see - or just choosing to ignore - underlying risks, according to a new report.

Airmic, the UK-based risk management association, unveiled the findings of the first stage of its two-stage study by Cass Business School into companies that have suffered severe setbacks. The report looks in detail at eighteen companies, which had an aggregate value of more than $6 trillion, including AIG, Arthur Andersen, BP, Northern Rock and Cadbury Schweppes. Despite the wide range of businesses and events, it identifies seven types of underlying risk that transcend sectors and lead to corporate failure.

It finds that boards, including Non-Executive Directors (NEDs), often lack the skills to monitor and control the executives nominally under their supervision, and it says they often develop ‘risk blindness’ in the pursuit of reward and opportunity.

The report calls on companies to re-evaluate their procedures and structures so that risk managers and others who identify weaknesses are encouraged to draw them to the attention of their directors. It adds that risk and audit professionals may need to develop additional skills to fulfil this role adequately.

“This report makes clear that there is a pattern to the apparently disconnected circumstances that cause companies in completely different areas to fail,” said Airmic technical director Paul Hopkin. “In simple terms, directors are too often asleep at the wheel and blind to the risks that they face.”

“The way businesses exchange risk is increasingly interconnected but there is a major disconnect between Boards, Non-Executive Directors and their risk management teams. Even successful organizations can see their reputations shredded at the click of a mouse,” said Julian James, chief executive officer at brokers Lockton International and one of the report sponsors. “Global corporations will come seriously unstuck, unless their Boards fine-tune their risk radars.”

The seven underlying risks highlighted in the report are:

  • Inadequate board skills and inability of NED members to exercise control
  • Blindness to inherent risks, such as risks to the business model or reputation
  • Inadequate leadership on ethos and culture
  • Defective internal communication and information flow
  • Organizational complexity and change
  • Inappropriate incentives, both implicit and explicit
  • ‘Glass Ceiling’ effects that prevent risk managers from addressing risks emanating from top echelons.

“Boards, and particularly their chairmen and non-executive directors, need to recognise the importance of risks that are not captured by current approaches. How they do so will vary by company and there can be no single template solution, but there’s no doubt firms that address these issues will become significantly more robust,” said Hopkin.

www.airmic.co.uk

•Date: 10th June 2011 • Region: UK/World •Type: Article • Topic: Enterprise risk management

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