Many local companies in T&T and the Caribbean do not employ proper risk management strategies which can lead to businesses collapsing. This is the view of Ram Angod, risk management consultant of Risk Veda Associates.
He said based on his experience, "risk management is not well practised by companies in the Caribbean and even by the OECS countries. "The indigenous companies are not picking it up fast enough...there is still a lot of 'home grown' wisdom and practice in the way companies are managed," Angod said. Angod was delivering a presentation on Tuesday on Managing the Enterprise for Success which focused on the role of risk management and governance, held at the Crowne Plaza, Port-of-Spain.
Another critical area that played a key role in a company's success was the issue of proper governance practices.
He pointed to the fact that, in T&T, there has been the practice of cliquism regarding the appointments of board of directors.
He said governance practices in terms of directors' competencies and risk management are not yet well developed.
"They are still in a fledging state especially risk management practices."
He explained that this culture of cliquism stemmed from the fact that T&T is not a big country and there were limited amount of directors and CEOs. "So the same set of people moved around to different companies." Angod also noted that this was one mechanism used to advance one's career. But this must change in order for companies to really be successful.
Hire local expatriates
In order for T&T to progress in these areas, Angod said there must be an infusion of outside inputs. He recommended that local people who reside abroad and have developed the requisite competencies be given an opportunity to perform in their country.
"We need to find a way to get them back home and to utilise their talents, we do not necessarily have to hire foreigners."
Making reference to RBTT, Angod said companies like this–managed from outside (foreign companies)–have very capable risk management policies because the culture was different.
He said these risk management processes are adopted by the local counterparts and, as a consequence, benefit from these practices.
Therefore, he stated that selecting the right people to be directors was very critical as they have a major role to play in the success of enterprises and managing risk.
However, Angod said, according to the UK Financial Services Authority, the events of the financial crisis exposed material shortcomings in governance and risk management of some regulated firms. He said although poor governance was only one of the many factors contributing to the crisis, it has widely been acknowledged to have been an important one.
The importance of a board
Angod said enterprise risk management and the role of directors are important in mitigating factors that may contribute to business failures. Citing a 2009 JP Morgan Chase report, Angod said that the heart of the problem across all sectors was bad risk management. He noted that many market participants did not prepare for the possibility of a highly stressed environment whereby they excessively relied on rating agencies. He said they stretched too much for current earnings and they did not react quickly when markets got bad.
He added that, in many cases, risk was not managed on an enterprise basis and not adjusted to corporate strategy.
Risk managers, he said, were not regarded as an essential part of implementing the company's strategy and, most important, boards were in a number of cases ignorant of the risks facing the company. "So for directors to be more effective and transparent, it was critical that the members of the board are knowledgeable in the particular field, be able to match the director skills to the organisation's critical needs, maintain director independence from management and the directors must know the company's key risks."
The board, he said, must also be capable of providing oversight in enterprise risk management, the integrity of financial accounting and reporting and the effectiveness of internal controls and applying the best practices for managing itself.
Company failures
Angod noted that when employing risk management strategies, it must be taken into account that human actions are inherently imperfect and the environment consisted of pervasive threats.
Therefore we must be mindful of inflated ego, greed, ignorance, incompetence, complacency and dishonesty. He explained that the aforementioned characteristics were the down fall of many established and well-known companies. He explained that inflated ego and greed could result in risky strategies and high risk transactions, whereas dishonesty could lead to fraudulent transactions.
However, in the case of ignorance, incompetence and complacency, companies employ bad strategies and engage in bad transactions.
Angod stated that while risk management was best positioned to deal with ignorance incompetence and fraudulence while board governance should be able to capture issues relating to all three including inflated ego and greed. He added that board governance played a major role in the areas of ego and greed because these were responsible for company failures which tend to operate at the highest level and cannot be controlled by the very people who engaged in these behaviours.