Too careful and you can choke

Ross Tieman reports on concerns that European companies could become so risk-averse that they will stifle entrepreneurial flair

The biggest risk to European corporations today, says Thierry Van Santen, president of the Federation of European Risk Management Associations (FERMA), is that they become so risk-averse they wither away.

Tightening rules on corporate governance, directors and officers’ liability, and product safety, combined with an increasingly litigious environment, are squeezing the entrepreneurial flair that is essential to corporate success, he says.

If directors and managers cower, cutting back on risk, they will forgo both organic and acquisitive growth opportunities, and pass up the opportunity to add value.

The alternative, he says, is to adopt positive risk management, in which risks are assessed, contained as much as possible, and then knowingly embraced in the search for profit.

Mr Van Santen, who is also head of risk management at French foods group Danone, says positive risk management is emerging as the third evolution in the development of risk management techniques.

Already in use at Danone and some UK companies, it is set for much wider adoption, he says.

Studies show that many leading companies have now implemented strategies of enterprise risk management, putting in place assessment procedures, legal frameworks, and targeting 100 per cent compliance with regulations in the countries where they operate.

The issues of compliance present a mounting challenge in the European Union, where the regulatory environment is changing fast.

One reason is EU enlargement, which added 10 eastern and southern European states to the previous 15 members in May.

In addition, the European Commission, the EU's executive body, is harmonising the European market with a string of directives that affect business. On May 1, a revised General Product Safety Directive was introduced in the original 15 EU countries.

This extends liability for faulty products, and any recall necessary, to everyone in the supply chain, from component manufacturers via importers to retailers.

It also changes the burden of proof. Wronged consumers will no longer have to prove the supplier was negligent. Rather, product suppliers and manufacturers will have to prove they did everything in their power to ensure the product was safe, or be liable for damages.

Member states are also implementing a directive on insider dealing and market manipulation this month and another on stock exchange prospectuses is expected by next July.

These changes are reinforcing the pressure on European companies to focus still more closely on risk management.

A joint study by FERMA, together with advisers Ernst Young and insurer AXA, published earlier this month, found that among 269 leading European companies that responded, 78 per cent had defined a risk management policy. But many were still working on its implementation. Of those tackling risk, 57 per cent were taking the ‘widest possible’ view of risks, while 32 per cent were looking at only operational risks and 12 per cent considering only insurable risks.

Looking at different countries, the survey also found that by and large, British companies were the Euro­pean leaders in broad-ranging risk management.

They were followed by German rivals, with French companies trailing in third place.

Companies’ perceptions of risk are also revealing. Asked to identify the biggest dangers, 51 per cent of companies surveyed said operational and production hazards and commercial risks were the biggest dangers. Some 41 per cent of companies also identified policy and regulation as a serious risk, 39 per cent were worried about the danger of a major crisis, and 37 per cent said data systems were a source of risk. A third also identified financial risks as a worry.

Respondents reckoned the fastest-growing risks were around corporate governance, data systems and the environment.

John Hurrell, head of the European and Middle Eastern risk consulting practice of Marsh, part of US insurer Marsh McClennan, agrees that “Even five years ago, the principal focus for most organisations was pretty well asset driven. It was about factories and equipment – the sources of their revenues.”

Now, he says, the focus is on protecting ideas, data, market share, and other “software”.

One reason for this is the dramatic change in the nature of many west European businesses.

Manufacturers have restructured, contracting out many manufacturing operations, concentrating others on single sites, slimming the number of suppliers they use, and relying on just-in-time deliveries. After restructuring, says Mr Hurrell, many European companies figured they had also outsourced risk.

But now, he says, there is a growing awareness that “a supplier's risk is also my risk.”

Hence companies are taking a mounting interest in the affairs of their key suppliers, and devoting far more effort to drawing up far broader contracts that require companies they rely on to ensure they too have done everything possible to minimise risk. According to Mr Van Santen, 40 per cent of big European companies have now crossed the watershed that allows them to see “positive risk management as a competitive tool”.

“It is a natural reaction in humans to want to avoid risk,” says Mr Van Santen, a veteran of risk management. The biggest risk to companies of using negative risk management in the current threatening environment, he says, is that “the company will find it is so risk-averse it will not create value.”

Threats to a company’s reputation constitute the second-biggest risk because this will affect a company’s ability to sell its products. According to Pricewater-houseCoopers:

“Reputation is the real threat ... reputation can take $10bn off market value in 10 minutes or ruin what was once a profitable business.”

But, says Mr Van Santen: “If you have good risk management systems ... you have an 80 per cent chance of avoiding a reputational risk”.