Complex risks neglected by board directors

Board directors at global businesses are failing to identify and manage emerging risks effectively, according to a recent survey conducted by Lloyd’s and the Economist Intelligence Unit.
The survey dealt with complex risk and although companies are spending more time on risk management, they are having difficulty managing new areas of risk such as cyber crime and the increasing difficulty predicting man-made and natural catastrophes.
Lloyd’s reports that over half of the companies surveys have had at least one ‘near miss,’ while one in three companies suffered significant damage as a result of failure to manage risk. However, an effort to identify and manage risk is present at the board level as the amount of time that the executive level spends on risk management has risen four-fold in the past three years.
Strengthening the board level concern for risk management initiatives is, Lloyd’s postulates, the recent corporate scandals and regulatory intervention. However, the research indicates that these same boards are ignoring the need to manage other severe headlining risks such as terrorism and the weather. Less than a quarter of the companies surveyed are assessing their natural hazard risks while less than half are reassessing their risk management strategies. Many of the problems that organizations face are structural as well as attitudinal.
“Today’s business leaders know that the likelihood of a costly risk management failure is high,” Lloyd’s director of worldwide markets Julian James says, “Yet while it is encouraging that boards are now spending more time and resources on risk management, this research clearly shows that businesses accept they should be doing more to recognize and prepare for the potentially crippling risks that they face.”
James adds that the board of directors must recognize the complex global risks that they face and place risk management “at the top of their agenda.”
David Foreman, chief underwriting officer at Lloyd’s insurer Wellington, says that companies practicing risk management are mainly using it to comply with regulatory demands and most of these companies, he says, have not realized the full benefits managing risks can offer.
“Whether the lack of preparedness to anticipate and deal with risk reflects misplaced confidence or ignorance is debatable,” Foreman says. “Until boards start to tackle these issues, risk management is likely to be seen by senior management as a constraint on their business, rather than the source of competitiveness that it should be.”
Although boards are paying more attention to risk management issues there is still great disparity in the way that organizations manage risk. Many are failing to embed a culture of risk management throughout the organization. Risk management centralized in only half of all companies surveyed and two thirds of the boards have not received training in either identifying emerging risk or implementing risk management across their organizations.