Spreading the bet | Forum for the Future
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About Subscribe Syndicate Publications Contact Spreading the bet 21st May, 2001 by Anonymous Rather than being a burden to business, the new developments in corporate governance can only benefit companies, argues Gareth Llewellyn of Entec UK. An important element of corporate governance is the need for businesses to take a proactive view of risks facing their operations. Companies that are willing and able to look at the full spectrum of risks facing themselves will develop a distinct competitive edge - and are likely to prove more sustainable in the long-term. The complexity and urgency of this area is illustrated by considering the following question. How many companies will feel confident that they understand the impacts of their business on the EC’s 1992 Habitats Directive? At first sight, this is an area to which few companies would wish to stray. However, this is an example of an issue that will appear in a future Europe-wide environmental liability regime, and, to give just one example, the potential of residual contamination on land to affect habitats may well have to be included in reported liabilities. With the publication of the Turnbull Report (GF 21, p38), the debate on corporate governance has been broadened to include environmental issues, in addition to strictly financial ones. The Turnbull principles put significantly more emphasis on the need for companies to understand both the environmental risks to their business, and the risk that they pose to others. These are nothing if not challenging, and in certain areas have raised environmental expectations to a new level. The reason why the recommendations of the Turnbull Committee are so significant lie in the fact that they are likely to take companies into areas where they are much less certain or confident - those of non-financial risk. This can seem both amorphous and daunting, even to those companies that have a good experience of financial management. Over many decades, companies have become adept at putting in place robust control mechanisms to minimise the financial risk both to the business and to its shareholders. In this area, traditional management consultancies and accountants have been instrumental in facilitating change. But, by their very nature, non- financial risks are more variable, and less straightforward to predict. Such risks are also dependent upon factors which may be entirely outside of the company’s sphere of influence. Which leaves the traditional model of risk assessment somewhat wanting. The traditional management response to risk has fallen into the familiar categories of risk transfer, risk sharing or insurance. Non-financial risks are not always amenable to any of these approaches, and new management responses such as negotiation, influencing and lobbying will have to be considered. Recent experience has also shown that shareholder value is at risk as much from changes in the reputation of a company as it is from the day-to-day activities of that business. Clearly the factors controlling reputation are very complex, but many are closely related to non-financial risks such as environmental impacts, welfare of staff, and business efficiency. However, that is one area where companies can foresee both the benefit and changes and are therefore increasingly keen to understand the risk to their business. There is clearly a feeling that the perceptions of key stakeholders can have a tangible impact on the business, and can be as, if not more, important than real risks. There is no doubt that this desire to understand reputation risks is driven to some degree by the levels of expenditure forced on some companies as a result of public pressure. The on-going cost to Shell as a result of Brent Spar is a prime example of this. The positive side of reputation risk has also been of interest to companies. The ability of some businesses to rapidly gain competitive advantage through exploiting public fears over certain risks has proven to be highly profitable. The example of Matel removing phthalates from teething rings at the first sign of public disquiet illustrates the real benefits that understanding reputation risk can bring. There is no doubt that Nigel Turnbull’s recommendations will have a fundamental impact on businesses in the UK. Of the companies quoted on the FTSE100, only 60% have produced separate environmental reports. When this is 0 0 0 0 New All Business Design Ecosystems Energy Food Society Special Editions
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Transcript of Spreading the bet | Forum for the Future
About Subscribe Syndicate Publications Contact
Spreading the bet21st May, 2001 by Anonymous
Rather than being a burden to business, the new developments in corporate governance can only benefitcompanies, argues Gareth Llewellyn of Entec UK.
An important element of corporate governance is the need for businesses to take a proactive view of risks facingtheir operations. Companies that are willing and able to look at the full spectrum of risks facing themselves willdevelop a distinct competitive edge - and are likely to prove more sustainable in the long-term.
The complexity and urgency of this area is illustrated by considering the following question. How many companieswill feel confident that they understand the impacts of their business on the EC’s 1992 Habitats Directive?
At first sight, this is an area to which few companies would wish to stray. However, this is an example of an issuethat will appear in a future Europe-wide environmental liability regime, and, to give just one example, the potentialof residual contamination on land to affect habitats may well have to be included in reported liabilities.
With the publication of the Turnbull Report (GF 21, p38), the debate on corporate governance has beenbroadened to include environmental issues, in addition to strictly financial ones. The Turnbull principles putsignificantly more emphasis on the need for companies to understand both the environmental risks to theirbusiness, and the risk that they pose to others. These are nothing if not challenging, and in certain areas haveraised environmental expectations to a new level. The reason why the recommendations of the TurnbullCommittee are so significant lie in the fact that they are likely to take companies into areas where they are muchless certain or confident - those of non-financial risk.
This can seem both amorphous and daunting, even to those companies that have a good experience of financialmanagement. Over many decades, companies have become adept at putting in place robust control mechanismsto minimise the financial risk both to the business and to its shareholders. In this area, traditional managementconsultancies and accountants have been instrumental in facilitating change. But, by their very nature, non-financial risks are more variable, and less straightforward to predict. Such risks are also dependent upon factorswhich may be entirely outside of the company’s sphere of influence. Which leaves the traditional model of riskassessment somewhat wanting.
The traditional management response to risk has fallen into the familiar categories of risk transfer, risk sharing orinsurance. Non-financial risks are not always amenable to any of these approaches, and new managementresponses such as negotiation, influencing and lobbying will have to be considered.
Recent experience has also shown that shareholder value is at risk as much from changes in the reputation of acompany as it is from the day-to-day activities of that business. Clearly the factors controlling reputation are verycomplex, but many are closely related to non-financial risks such as environmental impacts, welfare of staff, andbusiness efficiency. However, that is one area where companies can foresee both the benefit and changes andare therefore increasingly keen to understand the risk to their business. There is clearly a feeling that theperceptions of key stakeholders can have a tangible impact on the business, and can be as, if not more, importantthan real risks. There is no doubt that this desire to understand reputation risks is driven to some degree by thelevels of expenditure forced on some companies as a result of public pressure. The on-going cost to Shell as aresult of Brent Spar is a prime example of this.
The positive side of reputation risk has also been of interest to companies. The ability of some businesses torapidly gain competitive advantage through exploiting public fears over certain risks has proven to be highlyprofitable. The example of Matel removing phthalates from teething rings at the first sign of public disquietillustrates the real benefits that understanding reputation risk can bring.
There is no doubt that Nigel Turnbull’s recommendations will have a fundamental impact on businesses in the UK.Of the companies quoted on the FTSE100, only 60% have produced separate environmental reports. When this is
00 0 0 New
All Business Design Ecosystems Energy Food Society Special Editions
set against the fact that environmental liabilities will be one of the key areas companies will have to address aspart of corporate governance, the challenge is clear.
Finally, risk is almost exclusively seen in a negative context - the risk of damage to the company. However,companies can also use risk assessment and corporate governance to identify areas of potential opportunity,which if exploited successfully, can increase the value to shareholders.
Clearly a company that can maximise shareholder value whilst minimising environmental, health, safety andreputation impacts, is likely to be more sustainable.
Gareth Llewellyn is director and corporate governance advisor at Entec UK.
I think Green Futures isdoing a great job about asubject that’s veryimportant to us allDAVID ATTENBOROUGH
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