Business

Change and disruption – Enterprise Risk Management

by LEIGHTON MCKNIGHT

Wednesday, February 07, 2018

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Philosopher Heraclitus was writing about far more than business when he famously opined, “There's nothing permanent except change.” But his words ring true to business leaders around the world who need no reminders that they operate in an ever-changing business environment.

The unpredictable results of the changing climate are set to affect physical assets and supply chains. Governments are leading efforts to reduce greenhouse emissions implementing more complex forms of sustainability legislation. Shifts in economic growth and wealth will likely strain public services and facilities including natural systems – all of which make up a mere snapshot of some of the challenges firms will need to respond to in the coming years.

History has shown us numerous examples of disruption caused by changes in the business environment. From the Industrial Revolution to the global financial crash, these scenarios have all turned the world on its head and affected a variety of people from the very wealthy to the poorest in society.

Businesses need to be prepared to expect the unexpected through being open to the possibilities of new inventions, but also new ways of thinking about combating the risks in their industries. Through using emerging risks to fuel innovation, businesses are better adapted to the changing business environment and can devise a strategy for success. Through integrating risk management into their core operations, firms are more likely to achieve their goals and objectives, even when they encounter obstacles.

Enterprise-wide risk management (ERM) is the key to building an organisation's risk competency; its ability to identify, assess and prepare for any risks that may interfere with the entity's goals and objectives and is crucial for its growth and development.

Enterprise risk management (ERM) can be successfully tied to strategy and innovation, including:

• Interpreting disruptive waves: By incorporating risk-sensing tools, companies can more easily predict and respond to waves of disruption.

• Rethinking strategy and tools: With tools that enhance understanding of risk, companies can develop and alter key assets to combat changes in the external environment.

• Innovating business models: When responding to risk, it's important for businesses to not only innovate in their fields, but also consider business model innovations.

In the accounting and finance profession specifically, understanding risk is one of the keys to successfully diverting an entity from failure to success. Accountants are the backbone of business. It is becoming increasingly acknowledged that accountants are vital to driving down costs, identifying drivers of value and profitability, obtaining new finance, and strengthening balance sheets. Businesses and economies across the globe are recognising the importance of accountants, and there's growing pressure for accountants to develop business-risk acumen on top of their financial expertise.

ERM does not only enable an entity to innovate but can also protect it from the downside of innovation. Innovating without knowing the associated risk is a primary reason for failure in business. However, being proactive in planning against possible challenges paves the way to succeed in times of uncertainty.

LEGO Group, one of the world's largest toy manufacturers, is a company that has recently had to consider its options for innovation. LEGO has had great success across America and Western Europe markets. But in their endeavours to improve and grow the company, they considered an option of what they could do next: should the company shift from manufacturing in a few sites in Europe and North America, and build a factory in a low-cost location in Asia?

This move would impact heavily on the business and would require a detailed look at the current business model to ascertain whether it was robust enough for the challenges lying ahead.

LEGO executives employed scenario planning as a key tool to weigh potential outcomes which forced them to look keenly at LEGO Group's strategy, choice of primary customers, core capabilities, and organisational structure.

While scenario planning can't forecast the future, the process enables managers to consider the impact of decisions both in the short term and long term. It can also reveal newer scenarios that can arise, therefore giving early warning indicators of further factors to consider.

This knowledge will ultimately enable finance professionals to identify their firm's competitive edge, thus giving them a head start on their competition. Finance professionals, in short, should always maintain their focus on their entities' competitive advantages when plotting out the risks to their enterprises.

There are dire consequences for entities that fail to innovate. However, the only way to get the greatest results from innovation is to manage the risk in its implementation. Effective risk management is therefore crucial to sustainability of entities in today's world and therefore must be given strong priority in corporate governance.

Businesses in both the private and public sectors in Jamaica, the rest of the Caribbean and globally are under immense pressures for increased growth, profitability and adding to shareholder value. Not paying enough attention to proper ERM strategies can hinder attainment of these objectives with devastating effects. Fortunately this threat is getting more and more attention with, for example, the Ministry of Finance and Planning in Jamaica now including the establishment of proper ERM systems in the mandatory corporate governance framework for public bodies.

The Institute of Management Accountants (IMA) and ACCA have published “Innovation and ERM: Partners in Managing the Waves of Disruption” report which examines how businesses can successfully manage waves of disruption, using innovation and risk management. This publication is highly recommended, along with many other similar publications, as the importance of ERM continues to grow.

Leighton McKnight, CD, FCCA, FCA is a chartered accountant and a fellow member of the ACCA. A former president of the Institute of Chartered Accountants of Jamaica, he is the territory leader for PwC Jamaica, chairman of the Government of Jamaica Audit Commission and also chairman of Jamaica's Independent Judiciary Commission.

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