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Financial directions – Ignoring risks is a risky business

Some 21% of investment professionals believe that property-related hazards are a “top business risk” to the companies they analyse or invest in, compared with non property-related hazards.

However, the reverse is true for FDs, treasurers and risk managers – 69% of whom view property-related hazards as the most likely area for business-critical risk.

The 2004 Protecting Value Study, produced by FM Global, took the opinions of 400 senior finance, risk and treasury executives within ‘global 1,000’ companies, and more than 200 investment professionals.

It found that investment professionals lack awareness on some of the hazards faced by the businesses they analyse, or view these businesses as “too internally focused” on risk.

Finance professionals and risk managers in North America are most concerned with bricks and mortar-related hazards, such as natural disaster (21%) or fire (26%). UK FDs said supply chain problems are the biggest threat to revenues.

“There is strong recognition among the investment community of the importance of effective risk management,” according to Ken Davey, FM Global’s MD of EMEA and Asia-Pacific. “However, it’s clear that investment professionals don’t feel they know enough about the major threats to the businesses they are analysing and valuing.”

The majority of CFOs, treasurers and risk managers rate stakeholder levels of understanding of the top risks facing a business as “good” or “excellent”, but 68% of investment professionals rate stakeholder understanding of top risks as “fair” or “poor”.

And despite 75% of investment professionals “frequently” assessing the top hazards faced by businesses, they have “inadequate” information to make a meaningful assessment of these risks. Some 53% of respondents rate the quality of information contained within financial statements as “fair” or “poor”. Only 2% of investment professionals found financial statements to contain “excellent” information about the most severe risks faced by companies.

Some blame does lie with the investment professionals. Only 43% “frequently ask” senior executives about company measures to protect revenue drivers, and just 32% say that senior executives “frequently tell” them about such measures.

However, European investment professionals are more likely to ask companies about their risk-protection measures. One-half of European respondents “frequently” ask companies about these risk measures, compared with 34% in North America.

CFOs, treasurers and risk managers are more certain in their ability to protect top revenue drivers, compared with investment professionals. Most corporate respondents said their business is “good” or “excellent” at protecting its top revenue driver, compared with 51% of investment professionals.

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