June 25th, 2008

Breaking news: Risk Management is not only financial !

No, it’s not breaking anything… this dates back to 2006 !

I wish I could hear and read this more often and louder anyway.

Back to 2006, while giving a speech at the World Economic Forum, William Parrett, CEO at Deloitte, stressed the importance of developing new risk management strategies for corporations. He indicated that far too many companies still define the threats they face too narrowly and remain focused primarily on addressing only financial risks.

“One effect of globalization has been that risk of all kinds — not just fiscal, but also physical — have increased for businesses, no matter where they operate,” said Mr. Parrett. ”Information travels far and fast, confidentiality is difficult to maintain, markets are interdependent and events in far-flung places can have immense impact virtually anywhere in the world. A broader framework for defining and managing the variety of risks will be necessary if corporations are to mitigate the threats they face, assure sustainability and deliver value to their shareholders.”

The ongoing study of business leaders uncovered four considerations that are top of mind, as they review and upgrade security and risk management, including:

• Fostering a holistic and integrated risk management culture that features a chief security officer and that extends across the entire organization.

• Imagining the unimaginable, incorporating into risk positions the potential impact of low probability events and adding “stress test” models to risk-evaluation tools.

• Appreciating the significance of anti-Western sentiments, recognizing that corporations are on the frontlines of global influence and outreach.

• Identifying best practices as they emerge and putting in place the planning, analysis, monitoring and human resources necessary for their implementation.

“Clearly, there are additional expenses in defining risk more broadly and extending preparedness to address more possible events, but such an expenditure should be viewed as an investment that can reap great rewards when the unforeseen or unexpected happens,” he said. ”For management and boards of global corporations, risk management must now become an essential part of preserving and protecting shareholder value and thus an area where they should focus a good deal of their attention. They also need to do a better job at monitoring these intangibles.”

Being myself involved in this field of business, I don’t see much changes in corporations’ attitude toward risk since this speech was delivered to the world top executives in 2006, except maybe for a few of them operating in really harsh conditions or dangerous countries, where risk is to be taken as physical risk.

I am often advising my clients to integrate the Risk function in the company organization the same way they do for Marketing, Sales or Operations i.e. a new kind of transverse position, able to cove every aspect of the business acting on behalf of and reporting to the board, not less.

The current credit crunch conditions have given financial establishments a new and sudden awareness of the necessity of having financial Risk Managers on their payroll.

I wish it could be the same for every non-financial corporations as well, operating in sensitive business environments.

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