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john farrell
John P. Farrell
Founder and Principal Advisor
Intelligent Management Trends

jfarrell@IntelligentManagementTrends.com

IMT's blog Ixnay Ceteris Paribus provides commentary on leading trends in business analytics and risk-management supporting corporate decision making in volatile business environments. The author, John Farrell, has consulted with hundreds of IT and services vendors as Research Consulting VP with IDC, authored reports for Kennedy Information, and provided opportunity advice as part of IBM's Market Insights team. He holds a B.A. in Economics from the University of Pennsylvania and an M.B.A. from Babson College’s F.W. Olin School of Management. He can be contacted at jfarrell@IntelligentManagementTrends.com

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Ixnay Ceteris Paribus...because there is no such thing as planning in a static environment.

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2012 Risk Outlook – A Trap Year for Risk Management?

  
  
  
  
  

Businessman avoiding risk trapWith all of the advancements in the risk management profession, increasing executive recognition of its value, and an abundance of apparent risks ahead, 2012 seems to be an ideal year to deepen the integration of risk management and corporate strategy. The only logical conclusion…it must be a trap year.

Global events of 2011, including government overthrows, record natural disaster damage, slower emerging market growth, and sovereign debt struggles, set the context for 2012 enterprise risk outlook considerations:

  • Financial Risks: From a U.S. perspective, financial risks have a relatively stable outlook compared to other risk category uncertainties. References to $2 trillion in cash holdings among non-financial corporations tend to ignore debt is also at a record high, but the overall corporate debt-to-cash ratio is holding steady at 3.65. Low-cost equity will remain with the Fed overtly forecasting their continued low-rate intentions. An Ernst & Young survey of global companies notes 68% of large cap companies indicate the credit availability outlook is stable to very positive. Exchange rate risks should be manageable as the dollar gains versus the euro and the ever-looming yuan battle doesn’t materialize in 2012.
  • Economic Risks: At this point in the business cycle, economists tend to look for every reason why the economy will accelerate out of a recent recession. It’s never a good sign when already subdued forecasts are downgraded at the turn of the new year. The Economist’s survey has the eurozone now teetering on a recession with credit downgrades and no sovereign debt solution ahead. U.S. growth is set at a tepid 2.1% rate for 2012 while much of the commentary hedges toward lower growth prospects amid much uncertainty.
  • Information Risks: Information vulnerability expands with the faster adoption of cloud technology, mobile computing, social networking, and near field communication payments. Recent high-profile hacking cases of the U.S. Chamber of Commerce, Stratfor, PlayStation Network, and social networks and shopping networks in Brazil, South Korea (35 million users), and China (over 100 million users), indicate growing information security challenges confront all online businesses and individuals worldwide.
  • Litigation Risks: NERA’s review of securities litigation indicates the overall filing rate is holding steady as credit crisis-related suits wind down and M&A objections and suits against Chinese companies surge. Accounting and breach of fiduciary duty allegations make up the majority of new lawsuits with earnings guidance issues on the rise. As the financial sector lawsuits have dwindled, the technology industry accounts for the most securities litigation filings. A three-year upward trend is particularly noteworthy for the energy sector. A growing base of litigation investment hedge funds continues to introduce new risks and uncertainty as they encourage more lawsuits.
  • Regulatory Risks: The SEC’s publishing of the Dodd-Frank implementation schedule adds more certainty to their oversight expectations for 2012, but, much like Sarbanes-Oxley, uncertainty over practical implementation, hard deadlines, and penalties remain. In this deadlocked election year, the Obama Administration adds more uncertainties as it promises to use federal agencies to enact more currently unknown requirements.
  • Environmental Risks: Munich Re estimates the total economic cost of natural disasters reached a record $380 billion in 2011, far surpassing the previous $220 billion mark set in 2005. Japan’s earthquake and tsunami, the New Zealand quake, Thailand’s flooding, and over twelve separate billion-dollar-plus weather disasters in the U.S. contributed to what is considered a one in 1,000 years sequence of events. El Nino conditions are expected to continue in 2012 causing rain and cyclone events, but let’s hope the 1,000 year average works to our benefit.
  • Geopolitical Risks: Adding to the political uprisings that carry leadership uncertainty into 2012, Eurasia Group’s Ian Bremmer notes political transitions and elections will occur in nations representing nearly one-half of global GDP and four-fifths of the UN Security Council. Bremmer has agreement here that political transition risks will be overplayed as most policy changes won’t occur until 2013 or beyond and the eurozone ambles through its debt struggles. However, that doesn’t change the business obligation to rein in some potential long-term global strategies. For now, heed former CIA Director Michael Hayden’s warning that Iran poses the top threat in 2012 causing uncertainty with its nuclear program, security threats, and oil transport.

These major considerations for the 2012 risk outlook indicate we are in another year of business planning amid a high degree of uncertainty. Risk management principles should be at the core of corporate decision making. Fortunately, it appears corporate executives agree more than ever. Some facts from Accenture’s 2011 Global Risk Management Study:

  • 98% of companies across all industries and geographies consider risk management to be a higher priority for their company now than two years ago.
  • 86% say their risk organization is a driver for managing the increasing volatility of the economic and financial environment.
  • 91% note risk management is a key to enabling long-term profitable growth (49% state it is critical while 42% say it is important)

Corroborating the Accenture findings, a BDO survey finds board members are motivated as well. When asked what topics they would like to spend more time on, 55% of public company board members cited risk management (a higher percentage than any other topic area).

In a year with many acknowledged unknowns ahead, and management and board-level buy in, add the following positive trends for risk management program advances:

  • a growing number of well-educated and highly-experienced risk management leaders;
  • productive dialogues on risk standards;
  • advancements in automated data collection;
  • more software options for assessing, reporting, and managing risks; and
  • greater insights from management consultants to enable risk-oriented organizational change.

All of these positive factors promise to help advance risk management practices n 2012. So where is the trap? This point in the business cycle calls for bold corporate action to jump ahead of growth prospects. While the major surveys record explicit support from corporate executives, anecdotal evidence and buried survey questions indicate risk management programs still generally suffer from business manager perceptions of being: 1) a wasted time-consuming exercise; 2) a barrier to capitalizing on obvious business opportunities; and 3) an activity driven by compliance requirements. At the end of the year, we are likely to hear more voices criticizing missed opportunities because of conservative strategies mired with risk concerns.  

The mature programs in the financial services sector may have advanced past this trap, but young risk programs developing throughout other vertical markets are more susceptible to these image problems as they challenge long-established decision processes. The Accenture study states 80% of all companies either have an enterprise risk management program in place or plan to implement one in the next two years. About 16% are in the planning and implementation stage. If you take away the financial sector with nearly 100% existing ERM programs and the largest companies, these percentages drop quickly. In the BDO survey targeting public companies with revenues from $250 million to $750 million, less than half have a named individual to lead risk management efforts and two-thirds do not have a risk committee.

With many apparent uncertainties and risk managers seeking to make their mark, the value of risk management programs will be tested in 2012. This is an opportunity to elevate the role of risk managers and prove risk management is not about limiting growth options, but rather enabling bold risk-informed strategic decisions. Best wishes for an informed and calculated year of gambling.

John Farrell

Founder & Principal Advisor, Intelligent Management Trends http://intelligentmanagementtrends.com/blog/

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