Why should companies follow good management practice? Well here are five really good reasons that should leap off the page to any experienced business leader:
1.Cost of capital
Banks prefer companies that have good risk management governance and practices. If a company is looking out systematically for the bad things that might happen in the future they are more likely to still be around to repay the loan. As part of their assessment criteria banks will look at the overall governance of the organization. An effective risk management system will most likely have a beneficial impact on terms and rates. Even if it doesn’t improve terms it may well help to secure a loan or other approval.
2. Cost of Insurance
Insurance markets are particularly keen to see that companies behave as though they had no insurance. Companies that actively manage their risks are really trying hard to avoid things going wrong. This makes insurance companies more comfortable that the chance of a claim is reduced. Premium reductions of perhaps 10 or even 20 percent can be secured by using demonstrable risk management to position a company as ‘best in sector’ at managing insurable risks – as oppose being perceived as average or worse.
3. Rating agency approval
In the aftermath of the global financial crisis Standard & Poor’s started looking at criteria around risk management systems when determining corporate ratings. These days all rating agencies consider a good risk management system a plus when they are carrying out a review. The allocated rating whilst not guaranteeing success is extremely important for the corporate body in its relationship with many different stakeholders including customers, suppliers, regulators and investors to name only a few.
4. Client and Supply Chain approval
In modern tendering, part of the process of selection by many clients assesses the corporate governance of potential tenderers. If you want a contract with a big brand like HSBC, Nike, or Walmart then part of their due diligence process will include checking that you comply with their risk and compliance guidelines. One of the benefits of a good risk management system is that it is easier to meet these requirements.
5. Regulatory Compliance
Good risk management systems will help corporations to identify, engage and prioritise changes and improvements in compliance regimes. This can be extremely helpful for forward looking prioritization and implementation particularly when a corporate body operates in multiple sectors and multiple jurisdictions.