Risk managers beware ‘breakdowns or circumventions of controls’

Rob Perry made the comments to SR following the Risk and Insurance Management Society’s (RIMS) Risk Forum 2013, which was held in Melbourne recently. He took part in a panel discussion on emerging risks, along with RIMS president John Phelps, Zurich Risk Room proposition manager Daniel Radulovic and director of Vector Limited Karen Sherry.

Melbourne-based Perry said that his role in the discussion was to outline some of the key issues that should be on the radars of risk practitioners. “The message I wanted to get out for the risk management audience was that identifying the risks is only the first step,” he said. “They really do need to dig down to the next level to make sure that the complexity of the risk they’re talking about is understood.”

Employing the European horsemeat trading scandal as an example, Perry pointed out that issues such as product safety, labelling and food hygiene were identified as a matter of course by most food manufacturers and retailers. “So for this scandal to have occurred, there had to have been breakdowns or circumventions of controls,” Perry said. “And so my message to risk managers is, don’t just stop at identifying and then trusting that certain controls are operating.

“When you start testing controls, you really have to focus on how people and organisations might circumvent these processes and mitigants. They have to make sure that the controls that are in place actually work.”

Getting the board on board

One of the questions that Perry took from the audience was what he thought was required for organisations to take risk management seriously. “There are really two key factors there,” Perry answered. “Number one is that the increasing legislative and governance obligations on directors is seeing risk management taken much more seriously, and it is much more a top-of-the-agenda-type item now for boards than it necessarily was 10 years ago.

“Number two is events; there have been events all around the world, whether they be the horsemeat scandal, the BP oil spill, or the trials and tribulations that NewsCorp has faced. Events occurring in the market raise questions around risk management and force boards to look at it much more seriously as an ongoing issue.”

Entering emerging markets

Slowing economic development, demand volatility, evolving channels, rising costs and increasing competition are making profitable growth in emerging markets more challenging. Nevertheless, Perry said, ongoing economic instability has seen many, often publicly listed, organisations look to emerging markets for new sources of growth. “The challenge we see from a risk-management point of view is to ensure that you understand the market, the culture, the practices, the values in relation to dealings and transactions,” Perry said. “Globally there’s a lot of focus on foreign corruption and bribery, and understanding what you need to do to be successful in certain markets is a very critical issue. A lot of it is relationship based, and if you don’t have established relationships in those markets the sources of growth might take a lot longer to provide results than you had anticipated.”

Indeed, establishing a trusted local team is critical. Local managers need the autonomy to react quickly but within a framework that ensures decisions are consistent with global strategy and values of the firm. “It’s an important balance to get right, because you do have to be able to build the right levels of relationships, but what may be a custom in certain economies may not be allowable, say, under the UK Bribery Act,” Perry said. “So it’s a delicate balance, and getting it wrong – not having the right relationships, not understanding the market, not having local firms to partner with – can see you overstating the growth opportunity in the short term and being exposed to risk.”