BUSINESS RISK - WHAT IS IT Threats to achieving organization’s business objectives EXAMPLES OF BUSINESS RISK • Shortsighted goals • Ineffective processes • Financial fraud • Failure to comply with government regulations • Tarnishing reputation BUSINESS RISK INCREASES AS ENVIRONMENT CHANGES • Fierce competition • Pressure for increased productivity, responsiveness and responsibility, while reducing costs • Powerful new technologies • Increased external scrutiny • More decentralized accountability WHAT CAN YOU DO ABOUT RISK • Eliminate • Accept • Transfer - insure, outsource • Mitigate HOW DO YOU MITIGATE RISK? • Brainstorm ways to reduce or remove risk • Research best practices • Select the best alternative (cost-effective) CO M M UN IC AT I M CO & & M N IO AT IC UN ON CONTROL ACTIVITIES: processes, procedures, safeguards, access security, authorization RISK ASSESSMENT: identify, prioritize, mitigate risks; ongoing; wide participation ON AT I I AT M IN FO RM MONITORING: throughout R FO IN ON INTEGRATED INTERNAL CONTROL FRAMEWORK CONTROL ENVIRONMENT: tone at the top, infrastructure, compliance; culture: integrity and competence of people Adapted from Committee of Sponsoring Organizations of the Treadway Commission (COSO) http://risk.ifci.ch/00013184.htm CONTROL ENVIRONMENT • Established by the organization’s administration • Foundation for all components of Internal Control • Provides discipline and structure Includes:  Integrity and Ethical Values  Competence of People  Leadership philosophy/ operating style  Assignment of authority and responsibility, organization and development of people RISK ASSESSMENT • Develop/ Re-affirm organizations goals • Identify internal and external factors that must be addressed • Evaluate potential impact of the risk • Determine method of managing the risk CONTROL ACTIVITIES Policies (guidelines) and procedures (how work is to be performed) help ensure that management directives are carried out • Ensure necessary action is taken to address risk Include:  Approvals & Authorizations  Top level performance reviews (actual vs budget/ forecast/ prior period)  Track major initiatives  Physical Controls (inventories/ equipment/ cash/ other assets)  Information Processing  Segregation of Duties • • Good management practice • Process steps that enable improvement in decision making • A logical and systematic approach • Identifying opportunities • Avoiding or minimise losses • Risk Management is the name given to a logical and systematic method of identifying, analysing, treating and monitoring the risks involved in any activity or process • Risk Management is now an integral part of business planning in Vietnam Process Steps in Risk Management • Evaluate the Context • Identify the Risks • Analyse the Risks • Evaluate the Risks • Treat the Risks • Monitor and Evaluate • Communicate and Consult • Example of Business Risk in Exports E x p o rte r F o r e ig n B u y e r F o r e ig n B r o k e r or tr a d in g c o m p a n y D o m e s tic a g e n t b ro k e r o r tr a d in g h o u s e M a il o r d e r d is tr ib u to r O n lin e s a le s c o m p a n y In te r n e t b a s e d F o r e ig n B u y e r F o r e ig n B r o k e r or tr a d in g c o m p a n y F o r e ig n b u y e r F o r e ig n b u y e r F o re ig n b u y e r Corruption Perception Index Host Country Political and Legal Environment • A manager needs to understand the following issue regarding a foreign country/market ▪ Political risk – the risk that politics in the host country will develop in a way which makes it difficult for businesses to operate profitably ▪ Economic risk ▪ How to manage the risk ▪ The influence of politics and law Political Action and Risk • Ownership risk – danger to property and life • Operating risk – interference with operations of a business • Transfer risk – interference with the transfer of funds Ownership Risk • • • • Terrorism Kidnappings Coup d’etat Example: – According to a 1999 report by the Hiscox Group, a London insurer, 1,789 kidnappings occurred for ransom – There are some estimates that approximately 3000 kidnappings occur yearly in Colombia – Colombia, Mexico, former Soviet Union, Brazil, Nigeria, Phillipines, India, Ecuador, Venezuela and South Africa are among the most dangerous countries Operating Risk • Confiscation – host government transfers foreign-owned assets to a domestic company without compensation • Expropriation – host government transfers foreign-owned assets to a domestic company and compensates the foreign owners • Nationalization – host government transfers all assets of an industry that are foreign-owned to domestic companies Transfer Risk • Currency repatriation – risk related to not being able to transfer money out of the host country • Currency inconvertibility – risk related to not being able to change the host country’s currency into any other currency Intellectual Property Rights • Intellectual property rights (IPR) and the protection of those rights are an important consideration for businesses • The important issues to consider are: – the unwanted transfer of those rights – the failure in some countries to protect those rights, resulting in the unauthorized copying and use of intellectual property Economic Risk • Exchange controls – controls applied to specific goods or companies • Tax policy – tax policies may be used to control companies and their capital • Price controls – price controls may be used to control prices of imported goods or services Managing Risk • Choose a less risky country or less risky area of the host country • Negotiate a good deal with the host government by giving guarantees on local hiring • Take security measures to protect ownership interests • Obtain political risk insurance [...]... following issue regarding a foreign country/market ▪ Political risk – the risk that politics in the host country will develop in a way which makes it difficult for businesses to operate profitably ▪ Economic risk ▪ How to manage the risk ▪ The influence of politics and law Political Action and Risk • Ownership risk – danger to property and life • Operating risk – interference with operations of a business. .. improvement in decision making • A logical and systematic approach • Identifying opportunities • Avoiding or minimise losses • Risk Management is the name given to a logical and systematic method of identifying, analysing, treating and monitoring the risks involved in any activity or process • Risk Management is now an integral part of business planning in Vietnam Process Steps in Risk Management •... Management • Evaluate the Context • Identify the Risks • Analyse the Risks • Evaluate the Risks • Treat the Risks • Monitor and Evaluate • Communicate and Consult • Example of Business Risk in Exports E x p o rte r F o r e ig n B u y e r F o r e ig n B r o k e r or tr a d in g c o m p a n y D o m e s tic a g e n t b ro k e r o r tr a d in g h o u s e M a il o r d e r d is tr ib u to r O n lin e s a le s c o... copying and use of intellectual property Economic Risk • Exchange controls – controls applied to specific goods or companies • Tax policy – tax policies may be used to control companies and their capital • Price controls – price controls may be used to control prices of imported goods or services Managing Risk • Choose a less risky country or less risky area of the host country • Negotiate a good deal... Operating Risk • Confiscation – host government transfers foreign-owned assets to a domestic company without compensation • Expropriation – host government transfers foreign-owned assets to a domestic company and compensates the foreign owners • Nationalization – host government transfers all assets of an industry that are foreign-owned to domestic companies Transfer Risk • Currency repatriation – risk related... Risk • Ownership risk – danger to property and life • Operating risk – interference with operations of a business • Transfer risk – interference with the transfer of funds Ownership Risk • • • • Terrorism Kidnappings Coup d’etat Example: – According to a 1999 report by the Hiscox Group, a London insurer, 1,789 kidnappings occurred for ransom – There are some estimates that approximately 3000 kidnappings... to transfer money out of the host country • Currency inconvertibility – risk related to not being able to change the host country’s currency into any other currency Intellectual Property Rights • Intellectual property rights (IPR) and the protection of those rights are an important consideration for businesses • The important issues to consider are: – the unwanted transfer of those rights – the failure... or less risky area of the host country • Negotiate a good deal with the host government by giving guarantees on local hiring • Take security measures to protect ownership interests • Obtain political risk insurance ... financial) – Must be sufficient in detail – Must be accurate and relative  Quality of Communication Systems – Duties & Control responsibilities effectively communicated – Channels of communication must exist – Management must be receptive to employee suggestions – Must be effective communication across the organization – Must be timely / appropriate follow-up MONITORING Assesses the quality of the organizations