Western Cape Business News

Send  Share  RSS  Twitter  30 Sep 2010

MANAGEMENT: Effective Risk Management Essential


Recent Western Cape Business News

Risk management is a key component in the success of any business, but increasingly many companies forget this in the search for ever greater profits; and in some cases are not even aware of the risks that are being taken.

That was the view put forward by Mike Jackson, CEO of PPS – the specialist financial services provider to the graduate professional market – who was speaking at the University of Stellenbosch Business School (USB) on the failures of risk management. The discussion forms part of the USB’s series of Leaders Angle talks.

Jackson said the recent global financial crisis has demonstrated the need for greater awareness of the risks involved in business. “Too many boards simply don’t understand the business they are meant to be monitoring. They tend to grill CEOs when profits are down, but when profits are going up they show very little concern about how this is being managed, yet they should be asking just as many questions when things are good as well as bad.

There has also been too keen a focus on short term results in recent years with executive remuneration dependent on short term success and shareholders demanding ever bigger profits regardless of the effect that this may have on the sustainability of the company.”

Aside from the management and shareholders of a company understanding the risks being taken, he says regulators also need to understand the risks that they are monitoring. “Many regulators have never been involved in business, so while they understand the academic realities they may not have a full understanding of the risks to a business.”

Jackson says it was a lack of understanding of the risks being taken that led to the global crisis. “The value of many of the world’s biggest financial institutions shrank to a fraction of their former selves, while the South African banking system was hardly impacted as regulations were already in place to minimise the level of risk they could take on.”

He says some of the key questions people need to be asking of companies are:

-       How is this company making a profit?

-       How sustainable are these profits?

-       What happens if the number one client leaves?

-       Can the company survive three bad months?

-       What happens if the CEO resigns?

-       Are there any regulatory changes on the horizon?

One cannot mitigate against all risks and nor would one want to. If all a business wants to do is grow by inflation for the next 10 years then risk is not a paramount concern, however, if you want to achieve faster growth then it is vital to have an effective risk management strategy in place.”

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