Risk Management Required for Management Strategy
Effective risk management and risk communication are indispensable functions for increasing corporate value and implementing business objectives. Yet globally only a few companies have been able to implement ideal systems. Examining the situation outside Japan, consulting firm Oliver Wyman’s “Risk Communication” report outlines the current state of corporate risk communications and points to improve. When it comes to businesses other than finance, medicine, and similar industries where there are strict legal regulations, the report shows that many companies face barriers to implementing ideal risk management systems. For example, companies struggle with discrepancies in the risk information shared between the board of directors and the C-Suite and with delineating clear roles and responsibilities in risk management and communication. These issues are partially the result of executives and officers misconstruing risk management as a cumbersome legal requirement; therefore, failing to see its deeper significance for management.
The Significance of Risk Management
The essential purpose of risk management is to increase corporate value by achieving company business objectives. However, because Japan’s Companies Act makes risk management a requirement, it is often thought to be simply an internal regulation that is part of corporate governance. What is not yet fully appreciated is that companies implement risk forecasts to avoid or reduce future risk, secure current corporate value against possible losses and furthermore to increase corporate value. With appropriate risk management, companies can achieve their business objectives, inevitably leading to an increase in their value. Therefore, risk management is a business activity that executives and officers must understand as a corporate strategy.
Increasing Corporate Value through Appropriate Management
With economic globalization, risk from economic fluctuations and other external factors are even more uncertain and difficult to predict. Under such circumstances, stakeholders’ and investors’ demands for information disclosure are growing, particularly as a result of corporate scandals and the global financial crisis. For Japanese companies entering global markets in particular, information disclosure based on appropriate risk analysis is increasingly vital to securing the trust of existing shareholders and other stakeholders as well as appealing to investors who base their investment decisions on such disclosures.
In addition, an improved understanding and sharing of corporate risk, based on appropriate systems, will deepen understanding of not only the strengths and weaknesses of companies but also of the trends of the company’s industry and the overall macro economy. Again, for Japanese companies that can sometimes exist in a closed environment where language barriers and relative isolation lead to a scarcity of information for investors outside Japan, these efforts are particularly vital. It may also be effective in helping employees understand the company’s business strategy. If employees can uniformly understand their own company’s risk, they can dispatch unified views and information externally, too. Risk management is significant for both companies and their stakeholders.
Where SGIM Comes In
In particular, shareholders and investors may see the difference in risk management awareness between U.S./European companies and Japanese companies to be a risk itself. Companies in the U.S. and Europe recognize the lack of shareholder returns, profit growth and performance-affected stock prices as risks. Japanese listed companies must better consider these shareholder-associated risks. SGIM seeks to educate and work with Japanese companies to bring them in line with global IR best practices and make the case for global investments in Japan.
Translated and edited by Transpacific Enterprises