Risk: The good, the bad and the ugly of an economy under stress

Newsroom 15/12/2008 | 16:58

The oft-discussed financial crisis with its effects in every business field and its social and psychological implications also has positive aspects, because crisis is what you make of it, commentators say. Putting aside all the problems, businesspeople have started to see the opportunities it brings.
“The current harsh economic situation seems to have opened people's eyes both to the business environment and to the mass media,” said Valentin Mazareanu, co-regional director of the Professional Risk Managers' International Association (PRMIA) Bucharest Chapter. Recently, for the first time, the international and regional mass media have started to get more active by discussing different business behaviors which can lead to solutions for others.
Risk management has only just registered on the business radar in Romania, once the region started to feel the negative effects of the general situation. Mazareanu says, “The concept has now come to life Romania too. The media have started to write about it, companies are eager to learn about and to prepare and training sessions on risk management are now sought after.”
New in Romania, the non-profit organization PRMIA promotes the importance of risk management know-how within corporations as well as a certification program in this field.
Risk management does not offer individuals or companies tailor-made salvation solutions on tap, nor is it possible to single out the most vulnerable segments to risk. Mazareanu quotes two mathematicians, John von Neumann and Oskar Morgenstern, who have applied their scientific theories to business: “Humankind is the main source of uncertainty.”
Risk relates to vulnerability and identifying the vulnerable spot within a organization or field; and risk management means controlling the risk, Mazareanu summarizes. So problems can occur in any business division: HR, financial or technological.
So far, the effects of the crisis in Romania are the lack of financing as a result of regional banks' policies of suspending credit and all its ramifications such as halted projects and cost cutting measures. Another problem is decreasing exports due to a foreign market which cannot afford to import so much or is trying to curtail imports.
But, most of all, organizations will suffer because of their dependence on information. For example, in the recent KPMG's conference in Bucharest, “Think Restructuring – Win in Challenging Times”, Serban Toader, senior partner at KPMG in Romania, said: “There is no doubt that we are living in some of the most challenging times ever in the global financial markets. Romania's economy has so far not been too badly affected by the world financial crisis. Nevertheless, problems have started to appear with the availability of credit, and banks have become more cautious about lending. It is consequently prudent for Romanian businesses to watch global developments carefully and to plan for a time when cash flow could be more difficult. Companies need to look beyond quick fixes and start to think about the deeper structural changes they might need to make, so they are better placed to withstand a tougher economic environment.”
Mazareanu thinks that the so-called financial crisis consists of an even darker truth, that of manipulation and the mass media, which, through its primary need to inform, contributes to the mass panic. The consultant remembers a discussion between a mother and her child, when the latter asked “Mother, why is this called a crisis? Are we all going to go insane? The answer came as “It seems we are…”
The joke very much applies to the behavior of financial organizations, which have started to close their wallets, some though fear of what the future holds, some in order to speculate on acquisition opportunities. Some companies in Romania which have gained a solid market share have announced their intention to acquire distressed companies such as FMCG firm Cristim.
Daniela Nemoianu, partner in KPMG's advisory department, says that, “Managing strategic risk is a top priority for many business leaders grappling with a sluggish economy, severe credit tightening and overall market uncertainty. Such conditions call for companies across the industry spectrum to dedicate more time, attention, and resources to their risk management policies, processes and systems in order to ensure a well-controlled and transparent operating environment.”
Nemoianu adds that businesses will need to think about organizational changes to improve risk management in the current economic circumstances. “There will often be a stronger need for effective teamwork and communication throughout all facets of an organization from the ground floor all the way to the boardroom table. Internal audit, risk and compliance efforts will need to be embedded across an organization to enable reliable tracking and effective compliance.”
The biggest mistake a company can make with risk management is the lack of a culture for this concept. To identify any risk within an organization is not the exclusive task of a specialized department but of everyone involved in the operations of that organization, leading to mass communication within a corporate institution. The PRMIA's director points to the arrogance – close to ignorance – shown by some company stakeholders, who think only of profits and revenues. Such people reject any investment in risk management that does not generate a sudden profit or quantifiable result. However, the unprecedented economic situation will change this and persuade risk takers to ensure a good risk management back up.
Patrick Leonard, tax partner at KPMG in Romania, talked about risk management in the tax field. “Now more than ever, businesses need to ensure that they are fully compliant with their tax obligations. The tax authorities in most countries are becoming increasingly vigilant during this period of economic downturn, because they are anxious to prevent a fall in revenue to the state budget. So they are conducting more tax audits and enforcing rules more strictly. Companies need to avoid unexpected demands for payment of tax arrears, which could disrupt cash flow and also lead to added costs if penalties are imposed.”
The business world is like a row of dominos, said Mazareanu, with every division related to another. So, if one businessperson implements a safe risk management but his or her partner does not, the entire field is infected. The theory quoted by Mazareanu talks about “risk management politics related to the business partner.” He thinks that if such risk management systems had been applied before, many of the companies that now are cutting their budgets, reducing investments and seeing decreasing financial results would have been in a more stable position.
Toader of KPMG concludes: “Businesses need to start asking themselves questions. Is my company's business model dependent on sectors under significant stress? What changes have I made to my strategy in the light of potential recession? What strategic options do I have? Am I looking for M&A targets, strategic alliances or disposals?”

By Magda Purice

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