Risk awareness in conducting business. Why is it worth to implement risk management progamme? - Marcin Marczewski, Konrad Roziewski - SASMA TEAM

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1 SASMA Portal 2011 Risk awareness in conducting business. Why is it worth to implement risk management progamme? - Marcin Marczewski, Konrad Roziewski - SASMA TEAM - Marcin Marczewski, Konrad Roziewski Uncertainty surrounds us Let s begin by saying that we cannot be 100% sure about everything. Linear model of time the only natural one for the majority of people with clearly shown past, presence and future makes us perceive the coming events as uncertain. Each aspect of human activity is related to uncertainty about results stemming from our activities - each aspect and especially business activity. Risk is very often defined as a measure of uncertainty in the scope of probability and results of occurrence. In some respects, it is a tool which allows us encounter uncertain future. Speaking about high risk, even in common language, we have in mind, above all, events that are highly probable or that may implicate serious consequences, both positive and negative. On the other hand, Enterprise Risk Management is a means for taming uncertainty and risk that results from it. Blissful uncertainty Knowing that risk is an element of business conducting we may assume that it will be quite similar with its management. Very often opinions are heard that risk is managed all the time but often unconsciously. While making decisions, usually, we think about consequences sometimes even visualising possible scenarios, and there is only one step to be made to define its probability and results. Even if we do not do it in a systematic way, we often try to minimise undesirable consequences unconsciously using classic strategies in risk management of acceptance, minimisation, avoidance and transfer of risk.

2 One of better known sayings in theory of risk management says that you can t manage something that you can t measure ( If you can't measure it, you can't manage it, a statement ascribed to Peter Drucker). Business management in an intuitive way is connected with high risk of failure. There are several problems stemming from risk management in a short-term manner. Above all, results of such a behaviour are incomplete and changeable. Without systematic approach we cannot be sure that we thought over all possible threats. We have a natural tendency, human tendency, to exaggerate occurrences that are attractive in media, even if they have marginal meaning for our activity. Without formal frames we are inclined to assess the same event differently depending on its freshness, way and essence of transmission, as well as, time that passed between an event and its assessment. Who must do it? In modern times, practically all participants of public life and economy, including diverse organisations, public administration units, as well as, private people have to defy diverse and more complex threats every day. In case of companies there are also requirements of a necessity of effective risk management posed by stakeholders; meaning their stakeholders and owners, key contractors, as well as, public units, which on the basis of law regulations in force require from companies acting in a particular branch to implement practical solutions in the scope of management of particular groups of risk. For example, we may highlight companies from finance branch (banks, brokerage office, etc.) or companies listed on an exchange. Another example of such companies are those which were indicated as owners of critical infrastructure (from the point of security or defence of a country) companies from telecommunication, energetic branches etc. Unfortunately, as practice shows and what experts dealing with counselling in the scope of risk management say, still in the majority of companies (even within finance branch) implemented solutions are a list of wishes, dead regulations, procedures, policies provided to supervision units and other recipients as the only proof of their existence. An alternative for this is a situation when in organisations solutions for risk management are a part of organisation management, and they are only another problem in every day work of management board and nobody remembers about realisation of this tasks, a necessity of solutions testing, awareness elevating within this scope or improvements.

3 Examples? Unfortunately visible. Almost every day, we are informed about events confirming lack of implementation of practices in the scope of risk management by diverse organisations. It turns out sometimes that if an organisation has procedures in this scope it does not use them at all or controlling measures are not tested so they either are not active or are ineffective. One of examples for that is widely spoken in media delay of one fragment of expressway in relation to bad quality of a product. The investor explained that he hired a subcontractor company, which task was to control and receive particular fragments of the investments. Was it an adequate means in connection to existing risk? In finance branch there are also many negative examples of risk management. A crisis started by collapse of Lehman Brothers Bank in 2008 showed all imperfections of existing solutions. In Poland in the same time, many companies were on the edge of bankruptcy as a result of option affair ( Several big companies were bankrupt. It is puzzling that some companies from specific branches, despite that they realise service demanding high level of availability, they do not use even the most basic methods of risk management, not even speaking about more complex solutions in the scope of continuity action management. Do Management Board have such a huge risk appetite (Risk appetite an ability of an organisation to accept defined level of risk (Polrisk)) and consciously do not want to increase costs connected with risk management thinking that nothing Bad will happen? Or maybe they simply are not conscious of that problem? From the other hand, an example of a good and conscious approach to risk management is an information from one of hauliers about suspension of ferry routes for three days due to very bad weather. A decision was made despite the fact that their vessels were prepared and adjusted to sail overseas in worse weather conditions.

4 What it is for? Conscious and systematic risk management allows avoiding or minimising the scale of problems. Even if it does not eliminate them completely it will allow a significant increase of success of this enterprise. Unfortunately, difficulty lies in showing value of risk management system, not mentioning calculating magical ROI. The easiest way of showing benefits of implementation of ERM would be to precisely calculate loss which a company would avoid due to possibility of earlier noticing threats it is impossible due to known reasons. Advantages of implementation of ERM are: effective planning (both at strategic and operational level), conscious risk taking connected with conducted business activity, significant increase of certainty in decision making and aims reaching, bigger trust of stakeholders, increased resistance of an organisation to negative internal and external events, effective management of crisis situations and minimising finance losses caused by them, ahead planning that allows avoiding surprises, a proof of formalized approach in process decision taking, conformity with law regulations. What is more, a good ERM programme gives guidelines on how an organisation should cope with uncertainty and also with chances. Due to this, it becomes not only a tool for company s security but also for its development. Companies which already implemented and use risk management systems for several years confirm that it is worth to take this effort and begin consciously think about future. Searching in the Internet diverse case studies on risk management we encountered some time ago a report made by AON company Global Enterprise Risk Management Survey We may read about results of research on the level of knowledge and scope of implementation of ERM in organisations acting around the World. Off-headedly, it is a pity that it is hard to find such complete studies with information about Polish market. It is practically impossible to find a company which would be willing to show a good implementation of risk management programme we know that they exist. Described in this document case studies

5 of several companies of branches, such as pharmaceutical and chemical industries, production and energetic industry, are interesting in which experience and also comments on benefits which they achieved due to implementation of ERM were discussed. Two companies: Eli Lilly and Pirelli use ERM to model and optimise production and distribution processes in order to secure good image that was worked out within several years. Origin Energy Company uses ERM in order to strengthen their position on the market and to increase certainty of investors, as well as, the value of the Company in the changeable surroundings of industry branch. On the other hand, Phoenix Park Gas Processors Company tries to reach the first position in the branch due to usage of ERM in the implemented processes in a company that are connected with security. All this should lead to a joint platform which would be supporting corporate risk management. AZ Electronic Materials Company wants to be perceived as one which manages their supply chain efficiently and knows how to cope with diverse adverse operational events, both internal and external. Clariant Chemicals Company may be proud of implementation of rules on accounting and clear division of tasks connected with risk management. An author of this report indicates that although each of the above mentioned companies encountered several problems in the process of implementation of ERM, they may be proud that they work on development of their programmes for risk management and on adjustment to constantly changing business requirements all the time. Each of them represents quite different approach to advanced risk management in a company. For summing up, we may present a branch for which good working ERM brought biggest benefits. AZ ELECTRONIC MATERIALS for which development of ERM culture on the global scale influences certainty and trust of clients. Results: quality control management and certainty, as well as, loyalty of clients. CLARIANT INTERNATIONAL which used ERM as a tool for measuring efficiency and accounting. Results: clear aims and reference points (standards) for transparency of decision process and a visible change of organisation culture in the company due to actions accounting to levels of particular employees. ELI LILLY leading position on the market as a result of ERM of supply chain process. Results: a possibility of detailed assessment of clients opinion on service of the Company, risk management in the scope of particular channels of supply chain. ORIGIN ENERGY certainty of investors due to good working risk management system. Results: proving the value of assets in very rapidly changing economic surrounding; Fully implemented culture of risk management.

6 PHOENIX PARK GAS PROCESSORS LTD linking security with risk management in order to achieve branch excellence. Result: high awareness in the scope of risk management to the level of particular employees, full analysis of risk in the cycle of programme life in every organisational unit. PIRELLI GROUP using ERM to manage reputation stemming from Company s tradition and to promote values of its stakeholders. Results: action plans for securing a Company against drop of production and implementation of ERM as a life style and management of organisation. Above mentioned and discussed examples prove that implementation of ERM in an organisation is a very complex process. Is it a laborious work on thorough familiarising with organisation, its aims, strategies, surroundings, backup. It requires adjusting proper solutions in the scope of risk management to company s specific character, and, as a next step, its planting on every level of the company, rules of risk management and employers and employees duties. On the other hand, on the basis of examples mentioned in this article, a list of undoubted benefits stemming from implementation of ERM, which slowly gain real value, was presented. To conclude, it is worth mentioning here an opinion of probably all people professionally dealing with risk that without full engagement of the Boards and other employees of an organisation we may only dream about a success in implementation of ERM. I will say more, it is pointless to start implementation of such a project. As Kevin W. Knight said You do not have to manage risk, surveillance is not obligatory!. (Kevin W. Knight known for active actions in the scope of implementation of risk management standards. Within the frames of International Organisation for Standardisation (ISO) he was a member of working group which prepared ISO/IEC Guide 73:2002 RM Terminology, as well as, he was a leader, also within frames of ISO, of a group which prepared ISO 31000:2009 Risk Management Standard and amendment of ISO Guide 73:2009. Due to his work for international standards he was mentioned by US Treasury & Risk s Magazine in 2008 on a list of The 100 most influential people in the finance world.) In the following articles which will be presented in this portal we will discuss practical aspects and good practice connected with implementation and promotion of risk management programmes in a company, as well as, usage of knowledge about risk in private life. We would also like to comment on events in the country and from the World, which may or should be perceived in view of risk management.

7 Marcin Marczewski, Konrad Roziewski Neither part nor a whole piece of a text published on the portal can be traced, published or further forwarded in any form and by any means (including: electronic, mechanic or any other means of utilisation) including copying, any type of digitalisation, photocopying or copying, and publishing on the Internet - without written consent of SASMA EUROPE Sp. z o.o. Any kind of usage or utilisation of a part or a whole piece of a text published on the portal, without written consent of SASMA EUROPE Sp. z o.o. or the authors, with violation of law is forbidden under threat of a penalty and will be prosecuted.

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