Why Risk Management Matters

Why Risk Management Matters

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Events over the past decade have fundamentally shifted the way organisations think about risk. As a result, companies around the world have made substantial investments in personnel, processes and technology to help mitigate and control business risk.

The ROI on risk management

The question remains as to whether these investments will be able to prevent the next catastrophic event, and whether companies are getting a return on their investments and are focusing on the risks that matter, according to research conducted by Ernst & Young.

Yusuf Dukander, Project Director: Financial Services at the South African Institute of Chartered Accountants (SAICA) believes that the risk management and governance landscape will see an evolution towards better quality oversight by management and supervisory practices embedded in many organisations across diverse industries.

Manage risk for financial gain

Lance Tomlinson, Ernst & Young’s Assurance Leader for Africa, says effectively managing risk can enhance a companies’ performance. He says that companies with more mature risk management practices outperform their peers financially.

“We found that companies with the most mature or sophisticated risk management practices generated the highest growth in a number of financial ratios, including:

  • revenue,
  • Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA),
  • EBITDA to economic value, and
  • return on invested capital.

The study revealed that sophisticated risk management creates value, mitigates risk and optimises cost.”

Companies that effectively embed risk management practices into planning and performance management are more likely to achieve strategic and operational objectives.

Own your company’s risk

Tomlinson advises that organisations need to effectively assess risks across the business and drive accountability and ownership. “It is critical for management to demonstrate the organisation’s strength of risk management to investors, business analysts and regulators.”

Dukander adds, the concept of risk governance can also be viewed as balancing the needs of all stakeholders with the risks associated inherent in the business. It also prompts management to adopt a culture of more risk reporting in an effort to drive profitability and the sustainability of an organisation.

Investors will pay more for better risk management

The Ernst & Young survey, which assessed 137 global institutional investors, reveals that 82% respondents were willing to pay a premium for companies that demonstrate successful risk management. Meanwhile, 61% will not invest where there is evidence of poor risk management and 41% would withdraw investment where there is a perceived lack of appropriate risk management.

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