Forget Enron and WorldCom – we can put them in a category labelled “Very Special Cases Indeed”. Think more about Equitable Life, WS Atkins (whose share price was hit by a financial system error), Stagecoach (whose US operations are causing major concern), British Airways (wrong-footed by cheap airlines and booted out of the FTSE-100), MyTravel (three profit warnings and counting), Aberdeen Asset Managers (split-capital investment trust manager), ITV Digital – and every telco that’s spent billions on third-generation licences. These companies have been affected by different types of disaster: in some cases one-off hits, in others a chronic collapse in their markets. It’s easy to sit on the sidelines and speculate whether any or all of these disasters were predictable or preventable. But we also wonder whether many of these businesses failed to engage in proper risk analysis.
At the recent CFO Summit at The Belfry, risk featured prominently in the conference programme. Much was said about the need to formalise risk policy, to use risk management techniques to create value and to consider the risk that business is missing out on opportunities.
All true and proper. But just as the accounting scandals in the US – and the less dramatic cock-ups in the UK – will have a backlash that will lead to the resurgence of beancounters, it is probable that risk management is in danger of retrenching into its loss-prevention roots. In practical terms, this means taking a tougher line on your worst-case scenario: much worse than simply “today minus 15%”.
Ten years ago, Richard North, then FD of Burton Group, told us: “Companies whose accounting is above criticism will be at an advantage in the 1990s.” For the next decade, the best companies will be those that can demonstrate that their strategies are robust and shock-proof.