H. Pierson: Effective Risk Management Necessary for Companies’ Survival

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Eromosele Abiodun

Companies operating in the financial services, manufacturing as well as oil and gas sectors can overcome the many challenges that have bedeviled them in the last few quarters if they imbibe effective risk management culture, a report by H. Pierson Associates has revealed.
For companies in Nigeria, H. Pierson pointed out that the last few quarters to date has been very challenging but also very sobering.

Challenges, it stated, have ranged from the impact of price risks for oil and gas firms, foreign exchange risks for manufacturing firms, credit default issues for financial institutions, costly compliance risk challenges against purported regulatory breaches by major firms across sectors and liquidity and capital risks for power companies.

“All these, amongst other risks to corporate sustainability, have taken significant toll on shareholder value in most instances. Against similar risk management challenges across other jurisdictions, global expectation for board oversight has risen astronomically. More specifically, stronger oversight over the corporate risk culture is being seen by many, as the next frontier for directors of boards, towards better handling of these risks by institutions.

“Here, the company’s risk culture refers to the institution’s norms, attitudes and behaviour as it relates to risk awareness, risk taking and risk management by the institution. In other words, the way the institution identifies, understands, discusses and acts on the risks it confronts and the risks it takes. Also key is the extent to which this culture has been embedded through mature risk practices, processes and systems, “it stated.

H. Pierson added that a sound risk culture provides firm-wide consensus that drives effective corporate strategy implementation and consistency in organizational performance.
“It is therefore a point of attraction for external stakeholders such as regulators, institutional investors and credit rating agencies. For systemically important institutions, inclinations are towards regulatory assessment of the institutions’ risk cultures as well as the assessment of the boards’ diligence in overseeing same.

“The tone at the top in building a sound risk culture, refers to the general ethical climate evolving from the board of directors, the audit committee and senior management. Good and consistent tone at the top is critical for sound risk governance and risk culture. This is because employee behaviour across the organisation, is significantly impacted by what they see and hear every day from those at the top,” it added.

For our current corporate challenges, it stated that boards must increasingly set the right tone at the top through transparency, consistency and the right formal and informal communication to the rest of the organisation.

It added, “The Boards’ risk management vision for the corporation, its true commitment to operating within clearly defined risk appetite, its effective oversight over same, its ethics and non-tolerance of compliance failures, should be communicated effectively throughout the organisation. The message must be consistent, unambiguous and authentic at all times. Clearly, the role of the board and senior management in exemplarily living and driving the institution’s risk culture is increasingly critical. It is a fundamental indicator of the level of risk management maturity of the institution and positively impacts on the company’s ability to weather periodic systemic pressures.

“For some of the crisis confronting institutions across various sectors, some questions to be asked regarding their large exposures would be: what is the defined risk appetite of these institutions? What is the level of board oversight over institutionalization and compliance with the agreed risk appetite? Were directors fully knowledgeable about the true levels and direction of the inherent and residual risks facing the firm at all times? If these exposures were within the institutions’ risk appetite and things have gone awry, could this question their risk appetite and risk culture?

“What was the tone at the top with regard to the risk culture? Did the tone at the top pose a warning signal? Were these warning signals heeded by the directors and senior management? Did the top have constraints in re-aligning the risk culture? This certainly may seem a good time for directors to individually and collectively re-assess and further sharpen the tone at the top.”
To successfully achieve the above, H. Pierson said boards should gain solid insight into the principles and expectations on risk culture oversight.

“Boards must also ensure periodic risk culture gap assessment and alignment. Next, Boards and senior management must actively track the maturity curve of their Risk Management Frameworks through assurance reviews of the effectiveness and impact of their risk management practices in helping achieve defined corporate objectives, as against overly focusing on the risks themselves. Boards will also need to ensure that the risk culture is characterised by an environment of open communication, and is accommodative of effective challenge by employees through diverse views and constructive engagement on risk issues.

“Finally, the Board would need to ensure it receives periodic consolidated reports on the company’s residual risk status and company objectives that are impacted, including reports on the soundness and compliance with a robust risk appetite framework. This puts a burden of accountability and transparency on the CEO, the CRO, the CFO and the head of Audit.
“Organisations with strong top-driven risk cultures continue to show resilience in challenging times as we saw in the 2008 period as well as today. The leadership of our institutions must therefore track their risk culture. They must constantly monitor and evaluate the impact of the current and emerging risk culture on the safety and soundness of the organization. They must develop measurable and repeatable approaches to evaluating the tone at the top of their institutions, identify gaps and have the discipline and courage to highlight and correct misalignments towards embedding the desired firm-wide risk culture from top to bottom,” it stated.