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Executives prone to reacting to latest threats; it is "highly likely" that corporate perspectives on business risks are influenced by threats of the day, a recent study finds.

The world has changed in countless ways in the past two years. Words like "terrorism," "SARS" and "corporate scandal" are commonplace. Photographs of the World Trade Center collapse and magazine cover stories on corporate financial mismanagement are all images etched in many people's minds.

The public suddenly has a new perspective on risk--that the world is a much riskier place than it once was. And it is highly likely corporate perspectives on business risks also are being influenced by threats of the day.

Take for example that historically, rims, explosions and natural hazards pose the most frequent and costliest threats to commercial and industrial property year after year.

Top financial executives and risk managers at the world's leading companies, however, indicate that "improper management and employee practices" pose the greatest threat to their firms' revenue sources, according to the 2003 Protecting Value Study.

This finding marks a significant change in views from the prior year's study in which many companies concurred that indeed "fire/explosion" and "natural disasters" posed the greatest threats to their corporate earnings.

It is also revealing that top executives react more strongly than risk managers to newly emerged threats to corporate prosperity. This year, 23 percent of financial executives cited "improper management and employee practices" as the most significant threat to their organizations.

Financial executives also are more likely to indicate that nonproperty-related hazards such as bad management and employee practices, product recalls, pricing volatility and personal accidents, pose the greatest threats to their firms' earnings compared.

Risk managers, on the other hand, find property-related hazards such as fires, explosions, natural disasters, mechanical breakdowns, terrorism, sabotage, theft, shortages and strikes have the biggest effect on revenues.

This may be because the risk manager's world revolves around developing and implementing optimal risk aversion practices instead of dealing with a portfolio of risks.

The good news this year is companies appear to be better prepared to recover from major disruptions. One-third of respondents cited their extent of preparation for a major disruption to their top earnings driver was "Fair" or "Poor." A year earlier, more than 50 percent of respondents indicated they were not well-prepared.

Overall, the corporate world views risk management as a long-term proposition. Eighty-five percent of respondents indicated they view risk management as an investment, in particular because they believe it protects their business continuity and there is a realized return on investment. Conversely, those who view it as an expense do so because they see it as a necessary cost of doing business with no realized return.

While financial executives and risk managers are in the business of balancing risk against return within a risk tolerance, there must be communication between financial executives and risk managers regarding perceived threats and business continuity planning efforts in order to form a more strategic view of risk management.

In the wake of government efforts to enforce corporate accountability and responsibility, financial executives and risk managers must collaborate to find new solutions to help minimize their companies' exposure. This is especially tree in light of a trend where contingency planning--once the realm of risk managers--has now reached the highest levels of the corporate boardroom.

If this can be accomplished, companies should be able to address long-term risks as well as the "threats of the day" that command so much press attention.

Ken Davey is managing director, International Division, FM Global.
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Title Annotation:point/counterpoint
Author:Davey, Kenneth W.
Publication:Risk & Insurance
Date:Aug 1, 2003
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