A lesson in Risk Appetite
Posted 06 Apr 16 by Ken Weldin
Disruption is one of today's common buzzwords. The following graphic which has done the rounds of LinkedIn & Twitter demonstrates the power of being a disruptor, putting to one side traditional business models & re-imagining new ones, particularly when you think digital.
In the last week however, two traditional areas of business, governance & what would be seen by most as common practice were raised in the context of risk. However, these usual suspects were discussed in an unusual way as regards what we normally see for risk.
Firstly at last week's Australian Financial Review Business Summit, presented by BHP Biliton, one of our leading companies "revealed that they have been pressured by large shareholders not to invest overseas." Richard Goyder of Wesfarmers commented that "as a CEO, there is nothing like growth. It's what everyone wants. But they want risk-free growth & that's the trouble." For Coca-Cola Amatil, CEO Alison Watkins noted "a relative lack of appetite for risks that we are going to work our way through."
So what for the age of globalisation, international trade, the Asian Century?
It would be hard to find any of our major businesses today who do not have overseas exposures in some shape or form - even if only through their supply chains with buying offices, offshored shared service centres or imported raw materials to name but a few. A cursory look at the top ASX companies by market capitalisation will point to very, very few who do not have international business on the revenue, customer facing side.
So what do we make of it then when one of those few companies makes its long awaited entry into overseas markets & the reaction of certain investors is 'Mmm, might be a bit risky?'?
I see Boards and management teams working hard to truly understand their value drivers & how to protect & nourish them by developing a risk appetite & tolerance framework to make their strategies work for them. In many cases, such exercises in risk management takes time and steps through all levels of the organisation.
This story however now points to the importance of engagement with investors in order to understand their risk appetite and to sell the company's vision/ strategy which is more often than not going to see our companies cross borders.
What this story does point to is that it remains a tough environment for strategies including M&A and international deals. At the Summit, Goyder reflected that it would have been "very hard" to get Board approval for the Coles acquisition in today's environment.
Our largest companies such as Wesfarmers & Coca-Cola Amatil may be able to work through this but what could this mean for our mid cap, newly listed entities?
Risk appetites in action.
Do you know yours?
Do you know what your investor group is?
Secondly and elsewhere in risk, the BBC reported that the Economist Intelligence Unit has added a Trump victory in the US election this year as a top 10 global risk.
The commentary considers that "he could disrupt (that word again!) the global economy & heighten political & security risks in the US."
The ultimate expression of democratic freedom of choice in the world's largest economy and the very embodiment of the true meaning of the word governance is now being talked about at a top 10 global risk.
Risk appetite in action again.
That surely is worthy pausing to think about regardless of your political preference.
It is important to be prepared to respond to the impact of such external shocks -the causes of them such as the EU referendum in the UK, Chinese GDP output or in this case, the choices of US voters are not something we or our corporates can directly influence.
However scenario planning or stress testing on these impacts remains an important tool.
Have you considered what a Trump victory might mean for you?
Will it impact your risk appetite?