NU Online News Service, July 29, 2:22 p.m. EDT
The combination of the financial crisis and a synchronized global downturn has had a dramatic impact on the willingness of companies to take risks in order to grow their business, according to a new report by Lloyd's.
The report found that while business leaders feel comfortable managing internal risks, such as reputation and corporate liability, they are less confident about external risks, such as currency fluctuation and cancelled orders.
The report produced with the Economist Intelligence Unit surveyed 570 board-level executives from around the globe to identify their top 20 risks and how prepared they are–or think they are–to deal with them, Lloyd's said.
It found that there may be great disparity between what companies think threatens them and what their exposure to a particular risk might actually be.
For example, the study found that environmental and natural hazard risks are seen as low priority. The extent to which macroeconomic factors have taken over the risk management agenda raises the question of whether companies are putting other, vital risks aside in their efforts to navigate their businesses through the current economic downturn.
While companies may be prevented from implementing strategic initiatives because of a lack of affordable credit, the survey suggested there is an aversion to activities that could have a negative impact on earnings in the short- and medium term.
More than half of companies globally said they have reduced their appetite for risk compared with one year ago–less than one in five indicated their appetite for risk has increased.
The survey found that manufacturing companies are most likely to say they plan to reduce appetite for risk, with 60 percent indicating they will do this, followed by 59 percent of financial services companies and 57 percent of information technology firms.
By region, respondents from Russia, Eastern Europe and Latin America said they are most inclined to have reduced their appetite for risk, Lloyd's said.
Lloyd's Chairman Peter Levene in a statement warned that boards should not discount certain risks simply because they feel those risks do not apply to them.
Lord Levene noted, "Business leaders must not be overconfident in how prepared they think they may be. While good risk management will help to minimize internal factors, they should recognize that they need to extend their thinking outward to their suppliers, customers and other stakeholders to ascertain how their behavior will resonate with the company itself."
He added that a Lloyd's 360 Risk Insight report last year found that 55 percent of businesses feel "a U.S.-style compensation culture is spreading around the world, and in a recession the speed at which customers or suppliers will escalate litigation must be considered."
Lord Levene also advised that recent events, or high-impact risks, should not overshadow longer-tail risks, such as climate change.
He said good risk management needs to take into account "the broader risks and potential threats, and keep an eye on the horizon. What will disrupt business tomorrow is just as important as what is faced today."
The report highlights the recent "rise of the risk manager." In the wake of the financial crisis, it says, they are now taking "center stage as boards apply more stringent filters to business activities and seek to fully assess threats."
The report will form the basis of a new Lloyd's 360 RiskMap, an interactive online map–to be launched in early 2010–that will display emerging risk hotspots globally. It will facilitate tracking changes in risk priorities and preparedness around the world.
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