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Strategic risk is the main threat to shareholder value, but too many firms are still failing to grasp this nettle.


No organisation is immune from the threat of bad publicity. Even Ribena, one of the world's most popular soft drinks, gave its parent company an unexpected headache recently. GlaxoSmithKline hit the headlines after two New Zealand schoolgirls claimed that their science project had found that the Antipodean ready-to-drink variety contained only a fraction of the amount of vitamin C stated in the company's advertising campaigns. This demonstrates how risks can come from the most unexpected places.

Most organisations have made progress towards addressing operational and financial risk, but have put far less thought into how they can manage strategic risk effectively. I was interested to learn from a recent CIMA publication that when companies suffer a significant loss in shareholder value, it isn't generally because of "natural hazards" or financial and operational problems. The main causes are usually strategic--for example, the failure of management teams to react to market changes or to integrate effectively after a merger.

Directors who don't build strategic risk into their corporate planning frameworks are gambling with their businesses' long-term survival. So why don't more firms take this issue seriously? The problem is that strategic risk is harder to define than other forms of risk, which reduces its "appeal". This is particularly the case with less predictable, bolt-from-the-blue crises. Some organisations argue that the Ribena-type scenario is merely an operational problem and has nothing to do with a company's strategic planning. Others say that anything which may affect a business's overall strategy should be considered.

This overview of risk management, and some of the different interpretations of it, were outlined in the second of CIMA's Excellence in Leadership reports. The series brings together leading members of the business community and CIMA's technical experts to address hot topics in management. Its articles make absorbing reading. Several drive home the message that strategic risk has a much greater impact on shareholder value than operational or financial risk--and can even destroy a company. The changes precipitated by globalisation and international compliance issues mean that strategic risk has become a serious challenge for all organisations. Although the report includes various interpretations of strategic risk management, many of the businesses it covers conclude that there are two main advantages of a robust risk management plan: it protects a firm's reputation and, if well managed, creates a commercial advantage by helping a company to recover rapidly and restore customer confidence. These issues were also covered in a recent FM article ("Public image limited", June), which explained how leading brands have weathered PR storms.

The institute has developed and piloted its own strategic risk solution, the CIMA Strategic Scorecard. This is now being tested by a number of organisations, including several plcs. it's a significant contribution to the portfolio of support services that the institute offers to its members and it reinforces the message that the CIMA qualification is the most relevant for business.

I'm looking forward to learning more about the issues relating to strategic risk management at the Excellence in Leadership conference in London on October 16. Fortunately, most companies won't have to face problems that are as high profile as the Ribena rumpus. But managers and directors need to focus on this form of risk management to ensure that their businesses have a healthy future.

More details about Excellence in Leadership can be found at Members booking for the conference will receive a 30 per cent discount.

CIMA is the Chartered Institute of Management Accountants, 26 Chapter Street, London SW1P 4NP. Tel: +44 (0)20 7663 5441 President Gordon Grant FCMA Deputy president Glynn Glynn Lowth FCMA Vice-president Aubrey Joachim FCMA Chief executive Charles Tilley FCA
COPYRIGHT 2007 Chartered Institute of Management Accountants (CIMA)
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Copyright 2007 Gale, Cengage Learning. All rights reserved.

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Publication:Financial Management (UK)
Geographic Code:4EUUK
Date:Sep 1, 2007
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