Strategic and Business Risk Management – What Company Directors Need to Know About Stress Testing (Part 2)

Today I’d like to offer up some key questions directors should be asking about their business to keep on top of risk management. I’ll also detail two case studies looking at business risk.

In my Part One blog, I looked at business risk management as it impacts on company directors.

That post also included a link to a previous blog I’d written on questions directors need to ask on stress testing.

While responsibility rests with management for stress testing, directors have an obligation to be properly informed to ensure that management teams are putting the right initiatives in place to “bulletproof” the business.

When it comes to stress testing strategy, as Peter Drucker once warned: “The most serious mistakes are not being made as a result of wrong answers. The truly dangerous thing is asking the wrong questions.”

So here are some additional questions you as a director should be asking, with a nod to examples of companies already putting this into practice:

  • Who is your primary customer? Allocate resources to meet and exceed your primary customers’ needs (McDonalds).
  • How do your core values prioritise shareholders, employees and customers? Core values must indicate whose interests come first when difficult trade-offs must be made (Merck).
  • What critical performance variables are you tracking? Too many KPIs and the business will fail, so concentrate on a few key variables (Citibank).
  • What strategic boundaries have you set? There are two ways to control such risk; you can tell people what to do or you can tell them what not to do (Apple).
  • How are you generating creative tension? Make the outside market pressure felt within the business.
  • How committed are all employees to helping each other? Employees must deliver their best where they work together to achieve shared goals. Pride in purpose, group identification, trust and fairness.
  • What strategic uncertainties keep you awake at night? Today’s success will be tomorrow’s old news and that is the heart of risk mitigation.

People risk management

Managing people risks in a business is key. A well trained and retained team is a team that will ensure success. Boards need to consider the following:

  • Get good HR reports regularly
  • Ensure there are formal arrangements in place for reporting serious and/or potentially serious HR matters
  • Does the CEO get HR reporting? Will it highlight a risk involving the CEO?
  • Are there managers who turn a blind eye to inappropriate workplace behaviours?
  • Does the company have a whistleblower’s policy?
  • CEO must report certain risks to the board.
  • Are resolved matters reported?
  • What is the company’s retention policy?

Now for the real-life experience, from my own business life:

Case Study 1: European Manufacturer – Environmental Health & Safety issues

Management knew there was non-compliance with Environmental Protection Authority (EPA) regulations, but the parent company would not address the issue. The board kept supporting management, arguing that, due to cost factors, they would deal with it when put under pressure to do so.

I was appointed chairman of the management board but was not initially informed of the non-compliance. This was the risk mitigation plan of action:

  1. At the first board meeting, I asked working directors to provide a risk summary of all company risks and current status.
  2. On reviewing this summary, the EPA risk, which could have resulted in closure, was discovered.
  3. We set up a team of management and directors to report on key issues to address. This required the building of a new plant – with risks including capital, sales disruption, production disruption, possible closure by EPA.
  4. Developed a plan, got ‘in principle’ corporate approval on a budget basis and then invited the EPA to work with us on our non-compliance – which they did because we approached them first.
  5. Developed a business continuity plan and contingency plan in the event of any key issues arising.
  6. Communicated with employees, suppliers and key customers – larger suppliers and customers face to face.
  7. Regular weekly bulletins sent to both the management board and head office management on progress and any issues.
  8. Considered all financial impacts – funding, debt level, impact on cost of production and additional sales required to justify the project.
  9. Project team paid bonuses for key achievements and completion on time within budget. The project value was US$17million.

The outcome was that we delivered on time within budget and no closure by the EPA. The key to our success: risks managed through a well communicated plan which was measured and adapted as we went. All stakeholders were made part of the risk mitigation strategy.

Case Study 2: Australian Manufacturer/Wholesaler

In this example, we were dealing with a new group brought together due to an acquisition involving six smaller companies. Directors worked in the business with management team, and the shareholders were the founders and a private equity firm. The key risks were the issues of integration strategy, culture, lack of risk mitigation strategy, poor implementation of integration plan, confused customers, as well as a lack of due diligence on the acquisition. The directors were focused on their wealth creation at the expense of business cash flow.

I was asked by the private equity firm to assume an Interim MD role and advise and assist management in developing a strategy to grow the business for a good exit. This was the risk mitigation plan of action:

  1. We created a risk profile together with risk mitigation strategy.
  2. A number of things needed to change but we had to focus on a few key variables.
  3. Too many employees were being hired at above market salaries but not delivering value. We put in place a people risk plan, together with a reduction plan.
  4. Customers were confused by the structure and what the new group represented. We developed a marketing plan to re-brand the integrated group into a simple structure and then a communication plan to share this re-brand with customers.
  5. Cash flow due to high vendor debt and high costs would reduce working capital to uncomfortable levels. The HR plan would reduce overhead and the marketing plan would bring back customers and allow for the creating of new customers. There were many other issues. The group lost $12 million due to a high write off on non-recoverable balance sheet items.

The outcome was this business was restored to profitability despite the GFC and natural disasters. Key actions taken were: risk profiling, strategy to deal with risk, review the balance sheet, identify key areas that could give significant positive improvements and mitigate further risk.

Vantage Performance is Australia’s leading business transformation and turnaround firm – solving complex problems for businesses experiencing major change. This blog post is adapted from a presentation to the Australian Institute of Company Directors.

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