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The road to success is littered with risk

Brendon Wilson

by Brendon Wilson

TINZ Director

Writing for Employers and Manufacturers Association

BusinessPlus Magazine

Risk is on everyone’s mind right now - there are many obvious reasons to focus business risk consideration - from Brexit to US election results, house market boom (or bust), to climate change, and then the tragedy and consequences of a major earthquake, and extreme weather complicating some areas’ recovery.

Building and infrastructure failure have raised risk and the ways it is addressed - these risks have been a New Zealand reality as long as people have populated these islands. There are very few companies right now in New Zealand who would ignore these possibilities, but without formal processes leading to decision and action, memories can dangerously fade and expose businesses to serious outcomes.

Let’s remember that risk itself is a good thing – for business it is a way of measuring possibilities, it is recognition of ‘what can happen’, and risk focuses analysis and decision-making. Importantly risk offers opportunity – without some risk there is no reward. Taking the right risks and reducing their downside has been the basis of all business since time began, and it is still, even in the most conservatively-run businesses. Leasing a premises is a risk, so is committing to a sales contract. Insurance is a megalith industry based on helping businesses and individuals mitigate risk, but insurance companies will be the first to say they can’t assume all the risk and absolve business from taking responsibility and planning how to handle the risks.

Most companies are practiced at considering risks to their business and strategising best responses to mitigate them. Some do this by formal processes, others less formally, but it is a brave and very foolish organisation which just waits for change or occurrence to happen before addressing the problem. Businesses with this approach rightly find it hard to attract capital, and regularly fail at an early stage.

Risks in business should be formally confronted by committed policy and process, so that any possibility which could affect the business is understood and addressed, either by making strategic change to avoid the possibility, or by preparing mitigation plans ready for use if or when the risk actually eventuates. There are endless professional risk consideration and management frameworks available to lead a company through a proven process. Businesses need to adopt and use a good process, and this usage should be at the centre of board and management planning.

When considering risks, start from the reality that risks will be identified in every part of the business and in all its activity. So understanding the risks to allow them to be analysed, prioritised and contribute to planning decisions, requires the detailed input of key individuals in every part of the business. And often the people to recognise and warn about risks will be staff on the front line or at lower operational levels, so encourage their speaking up, it may save your bacon.

There are many integrity or corruption risks which are unethical or illegal, and will also bring your business into the serious long term likelihood of reputational risk. Pressures to compete or deliver at times when the market is under stress and scrambling, are the very time to stiffen your protective processes and show your integrity and quality performance to the world: show you’re in it for the long haul.

Some topical risk areas to watch out for right now:

  • Procurement – even under time and availability pressures, do due diligence on suppliers, bring them into your own company’s processes to ensure integrity and openness, increase not relax processes to check quality and compliance at all points, and if you are procuring through RFI-RFP processes don’t take short cuts in all the diligence steps.
  • Procurement - Watch out for collusive bidding to provide to your company – collusion or bid rigging can be very subtle. Although it can be made to look reasonable, the result is corruption and is illegal, and your business is the loser, as are your customers and your shareholders. Widen your range of potential suppliers and ensure your purchase or tender requirements are straightforward and firmly applied.
  • Sales – remember that any agreement or understanding between competitors that results in setting the price of a good or service, or interferes with how a price is reached, is price fixing, and is illegal. So don’t discuss pricing with your competitors and do ensure your staff are closely familiar with the Commerce Act. Even staying mute in a meeting in which prices are mentioned can put you at odds with the law if you don’t put your hand up and withdraw.
  • Internally - Ensure your internal processes and culture are up to the task of keeping your own people on the straight and narrow, and not able to fall into habits or shortcuts which make them vulnerable to temptation or supplier collusion.

A New Zealand Example A Commerce Commission investigation in New Zealand found competitors in the wood preservatives market were taking part in price fixing and market sharing agreements. This included sharing pricing information and agreeing not to compete on price, and not to compete for each other's customers. As a result, farmers were paying higher prices for fence posts and homeowners were paying more for their house framing and decking timber.

Following proceedings in the High Court, Koppers Arch Wood Protection (NZ) Limited, its Australian parent company, three Nufarm companies and two Osmose companies (including individual executives), were fined a total of more than $7.5 million for breaches of the Commerce Act. Would these companies now wish they had approached these matters and their risks differently? I think so.

The Commerce Commission has good advice in all these situations and more – have a look at their website and the excellent guidelines and fact sheets they offer.

Among all the possible operational, financial, logistical and market risks, some which are often not sufficiently considered are those of reputational risk – this is recognition that most businesses exist and trade on their reputation, and the risks to this reputation are many. If the grapevine carries the hint that a business’s integrity is low, or could be legally pursued for transgressions, or that their low reputation makes their future success a wobbly prospect, then everything from customer loyalty, to markets, to supply chain, to capital support, to staff commitment and effort, are all likely casualties – serious risk indeed! So integrity risk is widely recognised as a major factor for board and management priority. There are worthwhile positives in prioritising this area of risk: it is not hard to mitigate, and unlike most other risks, brings major business upside once understood and addressed.

A strong integrity code and culture, and implementation of a good integrity compliance programme, are invaluable to prevent risks of these and other lapses. A robust integrity compliance programme will include:

  • Adopting a policy covering bribery and corruption, fraud, gift-giving, entertainment and conflict of interest
  • Board commitment and responsibility for the integrity programme and its measures
  • Communicating this commitment to all staff and business partners
  • Training of key functions (eg sales, procurement staff)
  • Accountability – clarify who is responsible for ensuring compliance at all levels
  • Active ongoing understanding of relevant legislative and regulatory requirements, and regular checking to ensure compliance
  • Due diligence of agents, distributors, contractors and business partners, and their inclusion in your mutual monitoring and reporting
  • A thorough risk assessment of your own company’s operations – including agents, distributors, contractors and business partners
  • Risk policy adoption - regular measurement and reporting in all areas of possible risk
  • Encourage internal risk reporting and whistle-blowing – set up a mechanism so staff or business partners can report concerns without fear of derision or retribution

It takes twenty years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differentlyWarren Buffett


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