Risk Management–A Corporate Imperative for the Executive Team

All companies, regardless of their size and the industries in which they operate, are facing greater challenges with respect to identifying and managing the environmental risks that are related to their day-to-day activities.  It is becoming routine practice for larger companies to create a corporate risk manager position and to have that position report directly to the CEO.  Surveys indicate that risk management will continue to be a major concern for corporate executives in the years to come and the areas that are of most concern seem to fall into the following categories:

  • Corporate governance issues, including the impact of the federal Sarbanes-Oxley Act and the growing interest and active intervention in corporate governance among specific states in the US and in foreign countries.  In addition to the costs of actual liability for violation of corporate governance laws and regulations, companies are being forced to invest substantial amounts in compliance programs in order to satisfy the requirements of financial exchanges and business partners who themselves are heavily regulated.
  • Natural disasters (e.g., hurricanes, flooding and earthquakes) in the US and in foreign countries where companies have substantial assets and/or are engaged in a high volume of business activities.
  • Higher levels of litigation that can result not only in liability for claims made against a company but also in substantial additional expenses to defend against the lawsuits even if the company is ultimately found not to be liable.  Companies are being sued for all sorts of potential claims ranging from products liability to mismanagement of employee benefit plans and the number of active lawsuits that larger companies may be defending at any point in time generally runs into the hundreds.
  • Physical infrastructure and facilities risks, including the rising costs of maintaining aging facilities and the potential damage to products, property and humans that may occur as the company operates over public roads and railways.
  • Governmental regulation, apart from the corporate governance issues referred to above, that carries higher costs of compliance which will ultimately cause companies to raise the prices of their products and services and risk loss of market share to competitors.

The list above is by no means all inclusive and companies must also anticipate the possibility of terrorist attacks, unforeseen changes in customer requirements and the entry of new competitors or introduction of new technologies.  In addition, as companies do more and more business outside of the US they are exposed to local risks in each foreign country where they are operating including a unique set of laws and regulations and the possibility that changes in the political environment will have a negative impact on foreign companies.  Finally, while new communications technologies have revolutionized the way that business is conducted they also create new potential hazards—the risk that a business can be shutdown by natural disasters that disable the communications infrastructure and potential liability for theft of personal information that has been entrusted to companies for safekeeping.

Fortunately the increase in risk has been accompanied by the development of new tools to manage those risks.  Even small companies can establish systems to collect and analyze information regarding potential events that may result in losses and insurance companies are working with their customers on enterprise risk management (“ERM”).  In fact, a number of providers offer in-person and online courses on various aspects of ERM and companies should seriously consider having all of their top managers participate on a regular basis.  Viewed properly, risk management is part of the company’s overall strategic business planning effort to reduce and manage uncertainties in the environment in which the company operates.

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