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Risky affairs

Not long ago 'risk managers' were insignificant middle executives responsible for insurance matters. Now they are important consultants to senior management. In the USA some risk managers sit on the boards of corporations. The risk management and 'crisis management' industries are enjoying a boom in income and influence.

The corporate sector's new obsession with managing 'risk' goes way beyond conventional fears of a financial loss. 'Risk' now embraces everything from the possible loss of reputation to a terrorist attack. Senior managers have recently gone through a process of defining their 'risk tolerance' - how much risk they feel comfortable in taking, or rejecting, in their commercial decisions. To help them decide, they may now be backed up by risk audit schemes, risk modelling projects, risk taskforces and risk working groups, which provide information about potential worst-case scenarios.

Why do boards now attach so much importance to risk awareness? Of course, playing the markets has always been risky and it makes sense to be prepared for the unexpected. Now, however, the consensus is that forecasting the future is more difficult than ever before, due to increased competition, increasing pressures from shareholders, economic volatility and changing customer demands.

But these 'new' uncertainties are not all that new. The vogue for risk management is more a consequence of a change in how age-old uncertainties are perceived.

Take the 'risk' posed by changing customer demands - the assumption that consumers can change their buying preferences at the drop of a hat. This used to be called consumer choice, and advertised as a positive feature of the free market. Now it is reinterpreted as a major cause for concern.

Many claim that we are witnessing 'the death of predictability' in business life. It would be just as valid to point to greater stability in business and the economy, which makes forecasting easier. For Western corporations, inflation is low, profits are high, the world markets are more open than ever before. Compared to the past, when volatility in commodity prices, inflation rates, interest rates and currency movements posed real questions about the future, managers today have enjoyed a run of stability.

Despite this, the loss of faith in the free market has left managers feeling more vulnerable. Preoccupied with safety and preventing possible disasters, they surround themselves with a blanket of risk assessment and risk management mechanisms. As long as corporations remain constrained by their own lack of self-confidence, risk management consultancies look like being a safe investment.

John Hamilton

Reproduced from LM issue 121, June 1999

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