Addressing risk at board level

HOW MUCH TIME, money and effort should an FD put into dealing with the company’s risk and its insurances? The answer often depends upon how much support the company’s board/senior management gives to its FD.

Typically, it is not a lot and hence one of the drivers for three excellent, recent studies about the perils of underestimating the need to get risk on the agenda of your board.

The studies, by Ernst & Young, PwC/Mctavish, and Zurich/Harvard, are united on the devastating effects of lost revenue, loss of reputation and loss of opportunity when an unexpected event stops a business in its tracks; as it can.

Most directors are entirely unaware of the reality of the consequences; until it happens to them.

However well protected by insurance a company may be, the reality is that it’s only ever a reactive financial instrument and a slow one at that. In fact it is often the first time directors appreciate just what money cannot buy. Rarely is there enough money to pay for the full extent of the loss and disruption to the business. This is due to the underlying principal of a contract of indemnity. (To put the company back in the same position after the loss as it was immediately before it.)

So how do you grab the attention of the board and what do you tell them when you get it? Starting with the second point, what is the reason for engaging with the board?

In the Zurich/Harvard survey between one-third and one half of the respondents to the study cited five key business benefits of enterprise risk management (ERM) as:

• Increased risk mitigation,
• Better ability to identify and manage risks,
• Better strategic decision making,
• Improved governance, and
• Increased management accountability.

What none of them mentioned was profitability. That is what interests a board; making money and continuing, uninterrupted, to make money. Ernst & Young confirms this in its findings, reporting “that companies in the top 20% of risk maturity generated three times the level of EBITDA as those in the bottom 20%”.

Boardrooms are not the place for the science and jargon of the risk management industry, unless, there is a direct profitability in the management of risk. And, there can be.

Every FD knows that when the bottom line gets lower their job gets tougher. In our experience of working with companies in the aftermath of an unexpected event, the event often coincides with the company going through a vulnerable stage in its life.

Insurance companies investigating the loss at such a time will discover any vulnerabilities of the company at the time of the event, often leading them to find “good reason” to reduce the payment under the policy.

So how do you get the attention of the board?

Talk to them, individually, about matters that interest them. Everyone has his or her own responsibility for doing something to contribute to the health and wealth of the business. If something breaks down on their “watch”, then they have a problem. So ask all of them what keeps them awake at night – from where they sit in the business? Do it one-to-one; no-one will ever “fess up” in front of their peers.

Every one of them will tell you something interesting that you probably didn’t appreciate and which almost certainly won’t have been disclosed to the risk manager, broker or insurer.

What should you do with the information? Use it as reasons:

• to raise matters with your CEO; for instance the measures you might take to preserve continuity of profitability in the event of an event/incident.
• to suggest to the board how managing foreseeable risks, collectively, can improve the perception of the buyer/client of the products or services and so increase trade/profit.
• to discuss insurance cover with your broker on something other than price; such as the value and the limitations of the insurance protection you are buying.

Implementation
Who are the best people in the business to deal with risk and profitability?
Those best placed to assist are the rising stars of your middle management – whose future depends upon the prosperity of the business – and who have high stakes in reputation and remuneration.

They can look up and look down, commanding a better than average understanding of what really happens in the day jobs of most people in the business. Who better to be given some responsibility for making sure things don’t go wrong if they can be prevented? Who better for knowing how to fix things when something untoward happens? And what an experience for when they get to the top!

All of this needs someone to drive it, of course, but it is not a job for an FD. However, if you want to make life easier when the going gets tougher then having an eye to turning potential adversity into profitability is a unique selling point that will not go unnoticed.

Roger Flaxman is managing director of Flaxman Partners