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News < Back Sarbanes Oxley : Risk : Survey Managing Business Risk in 2006 and Beyond
The study, Managing Business Risk in 2006 and Beyond contains the perspectives of more than 600 financial executives, including CFOs and treasurers the majority of whom work for companies with at least US$1 billion or more in annual revenue. FM Global, a commercial property insurer, commissioned Harris Interactive to conduct the study. According to Ruud Bosman, executive vice president, FM Global, the results provide informative insight regarding how financial executives perceive and address their risks in an environment where increasing levels of personal accountability are placed on them for the successes or failures of their enterprises. These pressures are compounded by heightened and near-constant pressure from investors, regulators, customers and competitors. "With globalization and outsourcing stretching the supply chain and introducing new and never-before anticipated business challenges, the findings suggest many companies may want to ensure they are doing all they can to deter a disruption of any kind," said Bosman. "At the same time, it's encouraging to see so many companies focusing on risk control rather than simply buying insurance to cover losses. The most progressive financial executives do not wait for a disruption to their businesses to demonstrate the value of investing in risk quality." Bosman added, "Companies that manage their risks properly and communicate the effectiveness of such efforts to their many stakeholders will find they not only gain a competitive advantage, but also boost financial performance, enhance shareholder confidence and help protect the value their businesses create." Managing Business Risk in 2006 and Beyond: The Protecting Value Study During the past decade, the corporate world has experienced remarkable highs and disappointing lows-from startling advances in technology and productivity to suspect accounting, outright corporate fraud and terrorism. As a result, companies are under increased and near-constant pressure from investors, regulators, customers and competitors on several different fronts. This is compounded by higher levels of personal accountability placed on individual executives for the successes or failures of the enterprise. With globalization stretching the supply chain and introducing new and never-before-anticipated challenges, FM Global commissioned a survey to learn how financial executives at the world?s leading companies perceive and address their risks in an environment of heightened expectations. This study contains the perspectives and opinions of 600 financial executives around the world who work for companies with at least US$500 million in annual revenue. Some of the key findings indicate:
Risk Management is a Corporate Priority Ninety-six percent of North America-based financial executives say risk management is a ?moderate? to ?high? priority in relation to other management issues within their companies. Respondents from companies based overseas share a similar view. Extent Risk Management is a Corporate Priority 
Corporate Governance is Increasing Companies? Focus on Risk Management Eighty-eight percent of North America-based financial executives say recent corporate governance reforms have ?moderately? or ?highly? increased the focus on risk management at their companies. Respondents from companies based overseas say recent corporate governance reforms have had a more moderate impact on their risk management focus. Impact of Corporate Governance Legislation on the Corporate Priority 
Considerations: Since Sept. 11, 2001, the role of risk management and contingency planning has taken on added significance. In fact, many leading corporate executives say there was a ?very great? or ?significant? increase in external risks during the past five years and a more moderate increase in internal risks, according to research conducted by The Conference Board and Mercer Oliver Wyman. Furthermore, compliance with corporate governance reforms such as Sarbanes-Oxley in the United States, Turnbull in the United Kingdom, Nouvelles Regulations Economiques in France and KonTraG in Germany is changing the way companies manage their risks. Yet, it is all too easy to look at risk in silos. An effective risk management program should be a wide-ranging and continuous process that encompasses prevention, control and mitigation to protect a company?s value. Companies that have been successful at managing risks have brought multifunctional, multidiscipline people into the process together to look at all the risks of the organization. Supply Chain Risks Pose Top Threats to Companies? Revenue North America-based financial executives say ?Supply Chain? risks (25 percent) would cause a major disruption to their companies? top revenue driver?those assets they are most concerned about protecting. Moreover, despite well-publicized corporate accounting scandals and acts of terrorism, North America-based respondents cite ?Terrorism/Sabotage? (5 percent) and ?Management/Employee Malfeasance? (4 percent) among the least significant risks that would affect their companies? balance sheets. Respondents from companies based overseas share similar views as their counterparts in North America. Top Risk Affecting Companies' Top Revenue Driver
Considerations: Despite increased attention given to terrorism and recent corporate accounting scandals, many of the top risks to businesses are much more fundamental than the high profile threats of the day. In the book Predictable Surprises, published by Harvard Business School Press, the authors indicate that executives commonly undervalue and fail to act on the threat of predictable risks. They suggest that many companies only address problems after experiencing significant harm, and are more willing to run the risk of incurring a large, but low, probability loss in the future. By identifying and protecting your organization now against its top risks, you can better ensure that, should a loss occur, your company experiences a minor distraction rather than major devastation. More than in-house knowledge alone may be needed to determine your organization?s top risks and how those risks could affect the most sensitive areas of your enterprise and the value it creates. While it is beneficial to gather those individuals within your company who can determine what internal and external risks (including business, financial and operational risks) might adversely affect your enterprise, consider whether your internal group will be able to visualize those risks outside their experience. Bear in mind the benefit of bringing in experts from outside the organization who can help your company understand scenarios that may be beyond your internal team?s familiarity. Then map those findings against key business processes, key business locations, revenue streams and value drivers. This will not only help you better gauge your firm?s vulnerabilities, but also aid you with determining your firm?s risk appetite. Many Global Companies Say Risks Resulting from Globalization and Outsourcing are Low Priorities or Concerns While globalization is introducing new operational challenges as many leading companies re-engineer their operations and eliminate redundancies from their business processes, 42 percent of financial executives in North America say the risks associated with globalization are a ?low? priority or concern for their organizations. Additionally, more than one-half (54 percent) of North America-based respondents say the risks associated with outsourcing are a ?low? priority or concern. While financial executives based overseas share similar views as their North America-based peers regarding globalization-related risks, they place more of a priority/concern on outsourcing-related risks. Corporate Priority/Concern of Risks Associated with Globalization 
Corporate Priority/Concern of Risks Associated with Outsourcing 
Considerations: Companies? supply chains continue to become increasingly complex as many multinational companies outsource more of their business processes and information technology to Asia and third-world countries. Likewise, they are tending to locate and rely on critical aspects of their operations in areas subject to a greater frequency of natural disasters, different safety standards and legal structures. Therefore, it is critical to take into account whether a disruption to your supply chain anywhere in the world could result in a dramatic adverse impact on your company?s overall business operations. The ramifications of not addressing increased vulnerabilities can be significant. A supply chain disruption can cause a company?s stock value to drop by as much as 20 percent over six months, according to a study by Georgia Institute of Technology professor Vinod Singhal. Ensure effective business continuity plans are in place to deal with situations that may arise. For example, this may mean identifying alternative premises for employees or sourcing goods from new suppliers. Governmental and Regulatory Issues are Emerging Global Risks In contrast to current risks, the top two emerging risks for many North America-based companies, are ?Governmental or Regulatory? (14 percent) and ?Competition? (11 percent). Overseas, financial executives also see ?Governmental or Regulatory? (16 percent) issues as an emerging risk. However, ?Pricing Fluctuations? (14 percent) also present a leading emerging threat. Top Emerging Risks
Considerations: According to a study of more than 100 senior executives by the Economist Intelligence Unit, monitoring emerging risks and extending risk principles into wider business strategy are seen as more important tasks for the future. Keep an eye on the horizon and proactively implement improved operational, financial or management controls to prevent or limit the impact of emerging risks you anticipate. Those companies that prevent losses before they occur lower the annual financial impact of potentially disruptive events. A Major Revenue Disruption Could Have Painful Repercussions Overwhelmingly, financial executives globally indicate a major disruption to one or more of their company?s top revenue drivers could affect their organization?s competitiveness, in addition to affecting their organization?s revenue. Sixty-six percent of financial executives based in North America and 58 percent of respondents based overseas say such a disruption would adversely impact their companies? market share and/or company valuation. Effects to Companies? Top Revenue Driver(s) from a Major Disruption (Multiple responses accepted)
Considerations: Take the time to think about the longer-term consequences of your firm?s risks. In the Deloitte risk management study Disarming the Value Killers, many of the largest value losses among the world?s largest global companies were the results of events that were considered extremely unlikely and that those firms seemingly failed to plan for. The resulting losses caused many companies to lose more than 20 percent of their market value during a one-month period and, for hundreds of companies, it took more than a year before their share prices recovered to original levels - sometimes longer. Companies with the most stable cash flow achieve that by paying attention to everything that creates volatility. Additionally, addressing the concerns of cash-flow volatility and corporate governance can help place risk management much higher on the boardroom agenda than it has been traditionally. Companies Allocate More Budget to Risk Control than Risk Transfer In North America and overseas, companies agree that loss prevention and control is highly important. On average, respondents indicate they allocate more of their risk management budget to risk control techniques versus risk transfer. Allocation of Risk Management Budget Considerations: A firm?s management has a responsibility to its stakeholders to proactively take all the reasonable actions to ensure continuous operations. Loss prevention and control is critical because risk transfer options are not available for every type of risk. Moreover, the financial impact of many of the leading risks cited by financial executives in this report go beyond what any insurance can provide in terms of indemnification. While insurance serves a useful role in financial assistance, in the event of a business disruption, it often will not fully compensate a company for a loss, nor lost sales, a drop in market share, out-of-work employees, management time or damaged corporate reputation as a result of an incident. Insufficient Time, Budget and Personnel Are Key Obstacles to Addressing Top Risks Companies in North America and overseas share similar impediments to addressing their top risks. Financial executives in North America say the largest obstacles within their organization are ?Insufficient Time? (47 percent), ?Inadequate Personnel? (36 percent), and ?Insufficient Budget? (36 percent). While respondents overseas also cite ?Insufficient Time? (29 percent) and ?Inadequate Personnel? (20 percent) as obstacles, insufficient budget is less of an impediment. Obstacles to Addressing Top Risks (Multiple responses accepted)
Considerations: The most progressive companies do not wait for a disruption to their business to demonstrate the value of investing in risk quality and reallocating resources. Research carried out by strategic advisory firm Oxford Metrica has found a clear, empirical connection between companies? risk quality and their financial performance. Their findings show that improving risk quality demonstrates good corporate governance and has clear implications for shareholder value. Begin by examining your organization?s most critical vulnerabilities and the return on investment (ROI) of eliminating those top exposures. Risk improvement initiatives can be as inexpensive as implementing a new employee policy or as complex as a new capital improvement project. It is imperative to present a convincing business case to executives and directors that details the potential risks if they do not make the capital expenditure for improving the risk quality of their organization and the rewards if they do. Conclusion: Risk Management Fast-Becoming a Corporate Necessity In response to growing expectations from shareholders, regulators and customers?not to mention increased competition on a global scale?many global companies are adding risk management to their list of corporate priorities. While corporate governance regulations are catalysts for this change, companies report that operational and competitive issues also are significant factors. Among the chief concerns driving companies to improve risk management practices are a potential loss of market share and company devaluation as well as workforce cutbacks, exiting lines of business and other management-driven actions. Consequently, companies are taking the opportunity to demonstrate prudent risk management actions and a greater degree of accountability to various stakeholders. The majority of financial executives surveyed reported their companies allocate more resources toward risk control than risk transfer. This also may indicate companies would prefer to avoid a disruption of any kind rather than simply buy insurance, receive compensation for losses incurred or endure the concurrent cash-flow volatility that such an event may trigger. Companies optimally should analyze how they are allocating resources between risk transfer and risk control and strike a balance between the two. As briefly covered in this report, there are risk prevention, control and mitigation measures companies can take to protect top revenue sources from relevant risks. For multinational companies, these strategies can be deployed across the entire enterprise and are most effective when localized to account for cultural considerations. However, many companies still have much work to do to elevate risk management as a corporate priority, as evidenced by the high percentage that report they currently have insufficient time, personnel and budget to address their top risks. Still, it bears repeating: Companies who manage their risks properly and communicate the effectiveness of such efforts to their many stakeholders will find they not only can gain a competitive advantage, but also can boost financial performance, enhance shareholder confidence and help protect the value their business creates. Research Methodology Data for this study were collected by Harris Interactive on behalf of commercial and industrial property insurer FM Global. Harris Interactive was responsible for the quality of the data collected and FM Global was responsible for the data analysis and reporting. This study was conducted by telephone in March 2005 among 602 financial executives at major companies around the world. Random samples were created using both third-party and proprietary lists of companies with at least US$500 million in annual revenue. Detailed break-outs by region, annual revenue and industry are shown below. Data were not weighted. Therefore, the results reflect the views of only those executives surveyed. In theory, with samples of this size, one could say with 95 percent certainty that the results for the overall sample have a sampling error of plus or minus four percentage points. The sampling error for the various sub-sample results is higher and varies. Respondents by Country Headquarters
Percentage of Respondents by Company?s Annual Revenue
Respondents by Industry
About the Research Partners FM Global is a mutual commercial and industrial property insurance organization with a unique risk management focus. For more than 170 years, leading corporations around the world have benefited from FM Global?s superior insurance capacity, risk assessment services and proven property loss prevention engineering expertise and research. FM Global helps its clients better understand the nature of their risks and develop sound property loss prevention solutions that can effectively improve their risk profile. Headquartered in Johnston, R.I., USA, with offices worldwide. Harris Interactive Inc., the 13th largest market research firm in the world, is a global research company headquartered in Rochester, N.Y., USA, that blends premier strategic consulting with innovative and efficient methods of investigation, analysis and application. Known for The Harris Poll and for pioneering Internet-based research methods, Harris Interactive conducts proprietary and public research to help its clients achieve clear, material and enduring results. Harris Interactive combines its intellectual capital, databases and technology to advance market leadership through its U.S. offices and wholly owned subsidiaries, HI Europe in London, England, Novatris in Paris, France, and through an independent global network of affiliate market research companies. The study, Managing Business Risk in 2006 and Beyond is available online at www.protectingvalue.com. 
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