The Tribune

Risk management is a topic that has increasingly made headlines around the globe due to the COVID-19 pandemic. Locally, after the release earlier this month of my first article in this two-part series on why businesses fail, I have had multiple conversations with colleagues about risk management. What was evident is that views are split about whether proactive risk management or reactive risk management should be deployed by companies.

Assessing a company’s situation or processes to determine potential threats is proactive risk management, which aims at reducing the chances of an accident or malicious cyber attack occurring in the future. Conversely, a reactive risk strategy is based on past incident evaluations and audit-based findings, and focuses exclusively on responses to past incidents. An investigation of the incident occurs, and measures are implemented to prevent similar incidents happening in the future.

Sherwen.com wrote: “There are many valid cases for utilising one or the other, but if the two are successfully merged together, not only does it minimise risk but it can identify inconsistencies in a company that will advance the business once they’re patched.”

I now wish to address the final two of five areas that executive leaders must keep an eye on. Companies are at risk of zero and negative growth, reduced competitive advantage and human capital flight if management refuses to understand, or are unaware of, key risks.

Unchecked risk taking

Relying on talented people for risk management is crucial. However, without checks and balances, limits, independent monitoring and reporting, both opportunities and pitfalls will be missed. The absence of robust enterprise risk management, and independent review and assurance, or a combination of both, will be a huge mistake.

Herd mentality

Despite constantly-changing market conditions and operating environments, a company’s management continues to use the same strategy and business model. Directors and senior management often make the mistake of copying key competitors or deploying aged approaches when presented with a crisis. Some of their decisions are based on emotional reactions and instincts, rather than on thoughtful analyses.

Social media and digital marketing have subtly fuelled the ‘herd mentality’, and this has seeped into business decisions. For example, when making a decision on engaging a particular vendor, companies may heavily rely on positive online review sites or ‘likes’. However, these reviews or ‘likes’ on a social media page may be fake or generated by a bot, and companies could be misled. Research has proven the above is true, especially within small and medium-sized enterprises (SMEs).

Conclusion

Success in business today requires agility and the ability to constantly re-think, reinvigorate, react and reinvent. Boards of directors and executives are responsible for setting the tone at the top, evaluating company culture, managing identified risks and preventing so-called herd mentality.

NB: Derek Smith Jr is a compliance officer at a leading law firm in The Bahamas, and a former assistant vice-president, compliance and money laundering reporting officer (MLRO), at a local private bank. His professional career started at a ‘Big Four’ accounting firm and has spanned more than 15 years, including business risk management, compliance, internal audit, external audit and other accounting services. He is also a CAMS member of the Association of Certified Anti-Money Laundering Specialists (ACAMS).