Modern risk management: Many companies do not meet requirements
Although the importance of risk management in Swiss companies is steadily increasing, in many cases the requirements for modern, risk-appropriate corporate management cannot yet be met. Business decisions are still often made independently of risk and opportunity analyses. This is shown by the ERM Report 2019 of the Lucerne University of Applied Sciences and Arts.
For which decision-making situations do companies use information from risk management? This question was the focus of this year's ERM Report 2019, which was compiled by the Lucerne University of Applied Sciences and Arts together with SwissERM. It is particularly encouraging that almost nine out of ten companies use risk-relevant information for the development of corporate strategy (Figure 1). On the other hand, it is a cause for concern that only one in three companies takes a risk analysis into account when considering financing issues, and only just under one in four companies has an internal company assessment that is backed up with risk-relevant information.
Information is often not available for decisions
The study results suggest that in many companies in Switzerland, the risk management process is not aligned with the decision-making processes. Only just under one-fifth of the companies surveyed confirmed that risk information is always available for upcoming decisions (Figure 2). In still just under one-third of the study participants, risk-relevant information is partially incorporated into decision-making processes. Almost half of the companies state that they know either only partially or not at all how much uncertainty is associated with a corresponding decision.
Consequences are not known
The picture is even less favorable with regard to the sensitivity of financial ratios: More than a third of companies cannot establish a direct link between decisions and their consequences on financial management ratios. Moreover, only about one in six companies say they are aware of these sensitivities based on quantitative risk scenarios. This illustrates that risk management is often not linked to value-based management.
Inclusion of risk management in business decisions is mandatory
It is important that risk management in the company is not regarded as a separate process, but is included in the business decisions. By carrying out risk assessments for all important business decisions, the quality of decision-making can be significantly increased, as decision alternatives can be identified and rational insights can be gained as a result.
Business decisions are made on a daily basis. However, this does not correspond to the semi-annual or annual risk report that the risk manager provides to the company management. In order to meet the increasing demands on modern risk management, enterprise risk management in many companies must undergo fundamental change.
Source: Lucerne University
