Impending risks go on the front burner
Sunday, March 04, 2007
LAST September, consulting firm Accenture released a global survey that had a big surprise. Despite a stable global economy, booming markets and solid growth prospects, executives in North America, Europe and Asia now regard risk management as their top priority.
Surprisingly, managing risk was put ahead of achieving growth while increasing profitability. Looking after shareholder value was near
the bottom of the list.
Today's paradox is that growth, economic stability and solid profits are masking, and in some cases, creating new risks. This problem is captured in a new report from Britain's corporate regulator, the Financial Services Authority. In its Financial Risk Outlook report, the FSA said things had never been better, growth was steady and there had been no bad shocks to the system.
But it warned the risks had never been greater, and that there could be significant dangers in the next 18 months. "While global economic and financial conditions remained most favourable in 2006, a set of conditions has developed in economies and markets that could become unsustainable. Furthermore, the probability of these conditions unwinding in a disorderly fashion may rise over time."
There are at least 10 potential flashpoints ahead.
1. Raw material costs: Commodity prices are booming, fuelled by demand from the surging economies of India and China, and this has put pressure on margins. With the downturn in oil prices, the trend now is that raw material costs have been decoupled from fuel and are now driven by tight supply and growing demand. The prices are volatile and vulnerable to any shocks, such as terrorism or bad weather, hitting the supply chain.
2. China and India: Developing a China strategy is now considered an absolute must for companies aspiring to be globally competitive. The same goes for India, the world's second fastest-growing economy. China is well advanced in turning itself into "the world's factory" and India already controls more than half the global IT and back-office outsourcing market. The emergence of these two players presents tensions and issues for global trade.
3. Risk appetite: In a low-volatility environment, households and financial institutions have been taking on more risk.
4. Debt: As a result of rising house prices and a good job market, consumers are borrowing more, leaving them vulnerable and ill-prepared for a downturn.
5. Compliance: Regulations are piling on around the world, all designed to reduce risk. But the sheer volume of compliance requirements can stretch resources of smaller companies and result in high opportunity costs.
6. Cyber crime: Experts are predicting more electronic malfeasance and attacks. Greater technological complexity and more cross-border transactions are fertile ground.
7. Capital markets: Regulators around the world are keeping an uneasy eye on the private equity boom, which, they say, has all the signs of a bubble.
8. Geopolitical risks in a stable environment: Growth is robust and volatility remains low. Geopolitical risks, however, are growing with the continuing conflict in the Middle East and issues out of North-East Asia, particularly North Korea. Regulators, like the FSA, are concerned that financial markets are now so complex that their models for pricing risk are not that accurate.
9. Inflation: Rising oil prices have contributed to an inflationary surge and, although those prices have come down, the market remains volatile, vulnerable to potential shocks such as global warming, supply and Iran's nuclear program. In Australia, meanwhile, inflationary pressures are rising as a result of strong wages growth.
10. US housing: At the moment, there is little sign of the weakness in the US housing market creating any sort of contagion that would hurt the world's biggest economy. However, some economists are warning that higher interest rates, falling house prices and the credit ethos do not bode well for the US economy.
This list is by no means comprehensive. There are many more risks ahead, and the solutions to these are not clear. These include climate change and the prospect of pollution taxes or a credible system of tradable permits. The proponents say these would promote the development of a wider variety of alternative energy sources and encourage energy conservation but critics fear they would impose costs.
Then there is the changing face of managerial capitalism, where company managers now have to answer to fund managers when the real owners, the retail investors, are often unaware of these relationships.
Not to mention the insatiable demand for energy that has resulted in the doomsayers predicting we will run out of oil.
Globalisation and population ageing are also major flashpoints. Good risk management is about thinking into the future. What's so unsettling is that the imponderables ahead now seem even more profound.
US employers brace for flood of age-related lawsuits
Tuesday, February 27, 2007
America's rapidly-ageing workforce is going to lead to a dramatic increase in expensive age-related law suits, employers have been warned.
Author: Nic Paton
Lawyers have said they are already seeing age discrimination becoming a growing problem for employers as the baby boomer generation starts to approach the traditional age for retirement.
Even companies that have no intention to discriminate, or which are simply trying to improve their bottom line, may have policies and procedures that are evidence of age bias, said the lawyers at Epstein Becker Green Wickliff & Hall.
As the working population continued to age, it was likely employers would be on the receiving end of a surge in age bias lawsuits, the firm predicted.
In 2005, the U.S Equal Employment Opportunity Commission received more than 16,500 age discrimination charges but, with 20 per cent of the U.S workforce set to be aged over 55 by 2015, this number was only going to go up.
"This is a real crisis for employers who haven't properly established procedures for making sure that bias does not creep into decisions and who haven't reviewed and revised their employment policies to ensure fair practices," said Gayla Crain, attorney at Epstein Becker Green Wickliff and Hall.
"The situation is reaching a point of no return, with the EEOC already collecting upwards of seventy-eight million dollars on age bias lawsuits alone," she added.
A study in 2005 by the Center for Retirement Research at Boston College had concluded that a younger worker was more than 40 per cent more likely to be called for an interview than a worker aged 50 or older, she added.
"A policy or practice that seems acceptable on its face may nevertheless discriminate against the older workers in a company's workforce. This phenomenon is known as 'disparate impact' and it can be expensive," she continued.
The issue of "disparate impact" and older workers arose most frequently with respect to job termination.
When a company decided that it must reduce its workforce, it often naturally sought to cut the highest-paid employees first or the long-term employee whose performance had declined.
Yet these workers were also frequently the older ones. "A company must have a legitimate business reason for all hiring and termination decisions which may exclude older workers," explained Marty Wickliff, attorney and managing partner of Epstein Becker Green Wickliff & Hall.
"Above all, a company should develop and strictly enforce objective standards to be used in identifying and executing employment decisions, and seek counsel if there is any doubt as to the legality of a policy," she added.
Going Dark: Public Companies and Public Interest
Monday, January 22, 2007
by It's the great democratisation of the market where more citizens are the collective owners of the big companies. When society at large has some skin in the game, the companies become more accountable to society. It's a point I examine here when I look at the trend of the "universal owner".
Now there are many more constituents and vested interests, and that changes the game completely.
Just ask the ousted chief executive of Home Depot Robert Nardelli, a point made in this piece by The Wall Street Journal's Alan Murray that we have here via the San Diego Daily Transcript.
The trend of so many companies going private therefore might not be in the public interest. It's a point examined by Chicago Tribune columnist Andrew Leckey . Leckey draws on the comments made by Robert Mittelstaedt, dean of the W.P. Carey School of Business who, it must be said, is no friend of Sarbanes-Oxley. Just read his comments in this piece.
Still, Mittelstaedt now says that public companies have brought jobs, retirement plans and good investment and that the practice of private equity outfits to saddle the companies up with debt, and then unload it later might not be in the public interest.
More importantly, it undermines the way citizen investors are reshaping corporations and making them more accountable. It's a trend examined by Stephen Davis, Jon Lukomnik, David Pitt-Watson in their new book The New Capitalists, and summed up in their piece The Capitalist Manifesto: Managing the Rise of Citizen Investors.
The citizen investor, they argue, has laid down 10 commandments for delivering value:
1. Be profitable - create value.
2. Only grow when you can create value.
3. Pay people fairly to do the right thing.
4. Do not waste capital.
5. Focus where your skills are strongest.
6.Renew the organisation.
7. Treat customers, suppliers, workers and communities fairly.
8. Seek regulations which ensure your operations do not cause collateral damage and your competitors do not gain unfair advantage.
9.Stay clear of partisan politics.
10. Communicate what you are doing and be accountable for it.
Any trend that undermines these forces has to be watched carefully. That's in the public interest.
