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Mitigating corporate financial risks, by Pierson


Financial risk

Financial risk

For the umpteenth time, the need to develop effective control and management of risks as a way to avert dire consequences, as well as navigate the challenging times, has been brought to the fore.

For H. Pierson Associates, even manufacturing, oil and gas sectors can overcome the many challenges that have bedevilled their operations in the last few quarters if they imbibe effective risk management culture.

It would be recalled that from first quarter to date, companies across all sectors of the Nigerian economy, have had a challenging operation, with some recording significant losses, while others have closed down.

According to a report by the company, the issues have ranged from the impact of price risks for oil and gas firms, foreign exchange risks for manufacturing firms, credit default issues for financial institutions, compliance risks and regulatory breaches. There have also been liquidity and capital risks for power companies.

“These have taken significant toll on shareholder value in most instances. Beside risk management challenges across other jurisdictions, global expectation for board oversight has risen astronomically. More specifically, stronger oversight over the corporate risk culture is being seen by many, as the next frontier for directors of boards, towards better handling of these risks by institutions,” the company’s report said.

The company’s risk culture refers to the institution’s norms, attitudes and behaviour as it relates to risk awareness, risk taking and risk management by the institution.

“The way the institution identifies, understands, discusses and acts on the risks it confronts and the risks it takes. Also key is the extent to which this culture has been embedded through mature risk practices, processes and systems.

“It is, therefore, a point of attraction for external stakeholders such as regulators, institutional investors and credit rating agencies. For systemically important institutions, inclinations are towards regulatory assessment of the institutions’ risk cultures as well as the assessment of the boards’ diligence in overseeing same.

“The tone at the top in building a sound risk culture, refers to the general ethical climate evolving from the board of directors, the audit committee and senior management. Good and consistent tone at the top is critical for sound risk governance and risk culture. This is because employee behaviour across the organisation, is significantly impacted by what they see and hear everyday from those at the top,” it added.

The report warned that boards must increasingly set the right tone through transparency, consistency and the right formal and informal communication to the rest of the organisation.

“The Boards’ risk management vision for the corporation, its true commitment to operate within clearly defined risk appetite and effective oversight over same, ethics and non-tolerance of compliance failures, should be communicated throughout the organisation.

“The role of the board and senior management in exemplarily living and driving the institution’s risk culture is increasingly critical. It is a fundamental indicator of the level of risk management maturity of the institution and positively impacts on the company’s ability to weather periodic systemic pressures,” the report said.

Giving the current exposure of some financial institutions, it queried whether there was a defined risk appetite. “What is the level of board oversight on the agreed risk appetite? Were directors fully knowledgeable about the true levels and direction of the inherent and residual risks facing the firm at all times?

“If these exposures were within the institutions’ risk appetite, yet things went awry, could this question their risk appetite and risk culture? What was the tone at the top with regard to the risk culture? Did the tone at the top pose a warning signal? Were these warning signals heeded by the directors and senior management? Did the top have constraints in re-aligning the risk culture? This certainly may seem a good time for directors to individually and collectively re-assess situation.”

The report also prescribed the need for the board to ensure it receives periodic consolidated reports on the company’s residual risk status and company objectives that are impacted, including reports on the soundness and compliance with risk framework.

This, it identified, puts a burden of accountability and transparency on the chief executive, chief risk officer, chief financial officer and the head of Audit.

“Organizations with strong top-driven risk cultures have showed resilience in challenging times- from 2008 till date. The leadership of our institutions must therefore, track their risk culture. They must constantly monitor and evaluate the impact of the current and emerging risk culture on the safety and soundness of the organization.

“They must develop measurable and repeatable approaches to evaluating the tone at the top of their institutions, identify gaps and have the discipline and courage to highlight and correct misalignments towards embedding the desired firm-wide risk culture from top to bottom,” it concluded.

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