In an election year, identifying risks can prove to be a daunting task. What does enterprise risk management entail?  Ezekiel Macharia, Chief Actuary – Kenbright Actuarial & Financial Services−puts this into perspective

Does the average Kenyan care about risk? Well, this is demonstrated in the popular and regular demand for land “shamba” in the hope of protecting themselves from future shocks and provide some form of financial security. In the business world, there are regular shocks, say yearly (Christmas consumer boom) or monthly (end month traffic jam) and those that occur after a long period, say five years −for instance general elections.

This is not a doom and gloom article, where we shout from the roof tops that businesses should secure for themselves sabotage, strikes and terrorism insurance(S & T cover).

Ezekiel Macharia, Chief Actuary – Kenbright Actuarial & Financial Services
Ezekiel Macharia, Chief Actuary – Kenbright Actuarial & Financial Services

We have approached this article from the perspective of an Actuary or risk consultant in which an election is a long-term cycle event that can affect your business positively, negatively or both. It is also an important time to talk about how we can use the brakes on our business (enterprise risk management) to make the business move faster in the road of financial prosperity, shareholder profits and economic expansion.

 

Managing risk is about looking at the upside & downside of shocks affecting your business and deciding on four actions;

(1) Retain,

(2) Avoid,

(3) Transfer/Insure or

(4) Reduce.

Using these basic principles, a CEO of a large corporate or a section head in a small and medium enterprise (SME) (the backbone of our economy) can be able be effective in responding to risks that are affecting your businesses.

Risk framework

How well you manage the shocks affecting your business through an appropriate risk framework will determine the level of risk maturity of your organization. In the world of risk, are you on the defence – parking the bus at the goal post (reducing losses & focusing on controls)? or are you scoring goals (performance optimization with integration of risk management in decision making)?

Nevertheless, before you respond to shocks / risk, it is important that you identify them. Know Thy Enemy.

In an election year, identifying risks can be a daunting task due to the uncertainty in knowing the future outcome. It may range from legal risk (good or bad future laws affecting your business), credit risk (when your customers / suppliers are unable to pay you on time due to a market recession), market risk (assets you own moving up or down – these include property, shares at the Nairobi Stock Exchange (NSE), government bill/bonds, county government bonds, company bonds or exchange traded funds – ETFs), currency risk (the shilling in your pocket not being able to by much for those in the manufacturing business and need to import inputs), strategic risk (where your strategy is wrong for business in the new post-election environment), people risk (politically charged employees not working in harmony; industrial unrest), emerging risks (climate change causes the perennial Kenyan drought to be unpredictable)and many other types of risks.

Risk identification

There are many risks identification techniques which include brainstorming, independent group analysis, surveys, Delphi technique, gap analysis, interviews and working groups. As you undertake these techniques, you can also use tools to help yourself identity the possible shocks that will hit your business, with tools such as checklists, process analysis, SWOT (Strength, Weakness, Opportunity &Threats), PESTEL (Political, Economic, Social, Technology, Environment & Legal)and case studies, you can have a good starter kit towards risk identification.

For example, is your business ready to take advantage of opportunities that occur during an election cycle? These include changes in the governing party’s manifesto – for example changing focus and tax incentives from high income housing to low income housing can affect your customer base and hence affect your revenues for businesses in construction industry.

Upside risk include companies in the helicopter business getting more revenue – are the choppers enough and where will you keep them during periods of excess capacity.

When identifying risks, it is critical that the process is approached in a structured manner and that the risks are agreed by a majority of members in the organization (risk identification should not be the crusade of a lone ranger) and someone in the organization is held responsible for the risk (your risk champions). After successfully undertaking this risk identification activity, creating a risk register is appropriate with which the staff will update regularly, say every three months.

Another important element to note is that you will need someone to measure and analyse the risk. Actuaries do come in when the risk is complex and long-term but a regular business and especially SMEs may get away with basic rules like high impact, medium impact and low impact. I have seen risk reports with traffic lights which may help in the communication of the risks that the company may face.

Finally, regular monitoring of the risks that have been identified, measured, analysed and managed is very important to make sure that your risk management process is not a black box and that it is effective and relevant to your market beyond the election period. As humans, we normally react during a crisis and our hope is that some institutions will react to the election with implementation of enterprise risk management which will go a long way in making them agile and more competitive in the ever changing global economy.

Ezekiel is the Chief Actuary – Kenbright Actuarial & Financial Services (ezekiel@kenbright.co.ke)

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