What do extreme weather events and fiscal crises have in common? At first glance, not much. But when it comes down to it, both can have a similarly devastating impact on a company’s bottom line if not properly risk managed.
Effective risk management practices can mean the difference between success and failure, as countless examples have shown. It stands to reason, then, that risk management has the potential to improve earnings stability, which is a key driver of shareholder value. In fact, FM Global’s own research suggests that, on average, companies with effective risk management programmes are a full 40% less volatile than those with less advanced risk management practices. Their research also shows that there is an 80% chance of losing more than 20% of shareholder value (suddenly and on a sustained basis) in any given five year period, which means most chief executives and chief risk officers will have to deal with at least one critical reputation event on their watch.
This being the case, what should CEOs and CROs be looking out for as they seek to maintain bottom line stability? Navigating the great many potential confluences of risk events at a global level is an ongoing and complex task, with an even greater number of potential avenues to a damaged bottom line. But by identifying the key attributes of corporate reputation that are most critical to value generation or destruction, companies can begin to identify, measure and rank their potential to create or destroy value.
Brand and reputation are critical assets. According to Sadgrove, in large FTSE100 firms, brand identity is worth up to one-third of the total company value (The Complete Guide to Business Risk Management, 2015, Gower). Sadgrove points out that sectors with significant emissions levels and those dealing directly with customers are particularly exposed to reputational risks. But, he says, this can be turned to the company’s advantage; in the case of emissions, for instance, by going beyond the call of duty – or regulation, rather – and doing more environmentally than is expected. This is arguably successful risk management in practice.
Among the more common risks to corporate reputation are operational hazards including product recalls and manufacturing quality deficiencies, service disruption, financial losses and irregularities, leadership and governance issues, lawsuits and regulatory actions, and allegations over business practices.
Physical risk management practices
For physical risks, meanwhile, property loss data tells us that the average risk of property loss for companies with strong physical risk management practices is 20 times lower than for those with weak physical risk management practices. Companies with substandard practices were found to be more than twice as likely to experience a property loss and related business disruption.
Large businesses with strong risk management programmes compared with those with weak risk management practices, experience on average 55 times lower risk of property loss due to fire; fire losses that are four times less costly (an average £473,000 per loss, compared with £2m); 29 times lower risk of property loss caused by hurricanes, earthquakes and other natural hazards; and natural catastrophe losses that are seven times less costly – an average of £312,000 per loss compared with £2.2m.
Research has also shown that a flood could cost an average of £2m in property damage – making a compelling case for businesses to fully understand the exposure of their site and to prevent such losses from occurring in the first place.
The direct correlation between resilience and the bottom line can be seen across all sectors of industry, without limits or borders, making it easier to draw parallels from which to take powerful and potentially business critical lessons for risk executives.