Human capital risk, such as skills shortages, succession planning and the loss of key personnel are the biggest threats to businesses globally; and the issues surrounding climate change the most ineffectively managed, according to worldwide report by the Economist Intelligence Unit (EIU) and partially sponsored by business advisory firm KPMG.
The report, “Best Practices in Risk Management: Function Comes of Age”, finds that while businesses consider they are handling credit, market and financial risk well, confidence is lower in addressing human capital, terrorism and climate change issues.
The report finds more than 50 percent of respondents identify the importance of the skills issues, but only 32 percent say they manage these risk effectively.
The other key finding is poor self-assessment around management of emerging risks such as climate change where only 23 percent of respondents believe their company has effective plans in place.
It’s not all bad news, with the research concluding that the discipline of risk management has moved on from mere loss avoidance to become key contributor to market advantage, via improved corporate reputation and better standing among those charged with oversight (regulators and rating agencies).
The EUI report says certain approaches, such as decentralised risk management with centralised coordination, has become accepted best practice and that the discipline of risk management is coming of age and has founds its way into the mainstream of business practice.
Key global findings of the report include:
•Corporate stakeholders are demanding improvement to risk management. Efforts in risk management are being driven by internal and external factors. The board is seen by executives as the most important internal drive for strengthening risk management, while the main external drivers are the demands of regulators and investors.
•Risk permeates the organisation. The risk management function has evolved to become core area of business practice, which in the eyes of the executives has been driven largely by the board but embedded at every level of the organisation. Respondents identify strong culture and awareness of risk throughout the organisation as the key determinant of success.
•An increase in investment is predicted. Firms of varying size are planning to increase the investment in most areas of risk management over the coming years, suggesting that this business discipline, although evolving rapidly, will continue to expand and deepen its reach within organisations.
Auckland-based KPMG partner in risk advisory services, Jeremy Bendall, says the report has important lessons for New Zealand business.
“Boards are now seeing risk management as priority. Getting the culture right and embedding this risk management focus in the business is the challenge ahead.”
In responding to low confidence in climate change risk management, the report highlights the challenges executives face in managing risks that are less quantifiable.
“For climate change, most companies are still in the assessment stage so it is not surprising that confidence is lower in terms of ability to manage this risk as they are still working out what it all means,” Bendall says.
However, given recent public scrutiny around climate change and the likelihood of cap and trade carbon emissions scheme by 2012, climate change risk will move to the fore in coming years, he said.
“Just as the skills shortage has shown, the danger of inactivity in this space is very real and needs attention now.”
• “Best Practices in Risk Management: Function Comes of Age” involved interviews with 220 senior executives globally, from range of industries and company sizes, all of whom have responsibility for risk management. www.kpmg.co.nz www.eiu.com
