Partner Article

Too much “box-ticking” in risk management practices

Many companies are not prepared for what PwC has called “the new risk landscape.”

A new paper from the professional services firm suggests that too few organisations have adequate risk management practices, and that many are being outpaced by an era of catastrophic “black swan” events.

‘Black swans turn grey: the transformation of risk,’ calls for businesses to become more agile and innovative in order to combat events such as terrorist attacks, tsunamis or oil spills.

It suggests some firms practices are “worryingly incompetent” and by updating archaic practices, they could achieve wider risk resilience.

Richard Sykes, PwC governance, risk and compliance leader, said: “The risk landscape is changing, and established risk management approaches need to be updated to keep pace.

“Many organisations currently have the wrong focus. They major on financial and operational risks and crucially regard risk and strategy as separate rather than seeing risk-taking as a key source of value creation.

“But the world where risk events could be predicted, and their impacts controlled, is fast disappearing.

“By their nature, black swan events should only occur at unpredictable intervals. Yet recent experience suggests events that fit this definition are happening more frequently.

“Rather than being infrequent outlier events, it seems they are now part of a faster-changing and more uncertain world, which makes it hard for businesses to understand where new risks are going to come from.”

The paper suggests that current practice, enterprise risk management (ERM), is no longer fit for purpose, and can simply lead to box-ticking, process-led approach.

A lack of proper focus can leave large organisations with blind spots, where a high-impact risk could damage or destroy the business.

Proper risk management practice can boost a companies reputation it is argued, and even make them more appealing to prospective clients, giving a competitive edge.

Armoghan Mohammed, PwC risk partner, said: “By understanding today’s risk landscape, organisations can progress from managing specific risks to achieving wider resilience. What is needed is a new, more flexible and holistic approach to risk management that develops a risk aware culture and fosters an explicit focus on risk appetite.

“This will provide a clearer ownership of risks at leadership levels, with risk awareness and accountability shared across the organisation through a common risk culture. It can also give a higher market rating.

“There’s growing evidence that businesses that are seen to truly embed a risk-aware culture and behaviours are valued more highly by the markets.

“Crucially, ultimate responsibility for driving and embedding this change lies not with the risk function, but with the board. It’s their duty to embed the right risk culture and behaviours, supported by an appropriate rewards structure.

“The resulting awareness and scrutiny of risk at all levels in every business decision will help to protect the organisation’s reputation, and further enhance its resilience in an uncertain world.”

This was posted in Bdaily's Members' News section by Tom Keighley .