Coping with the Demands of Changing Regulation
by Jayson Dunne, Director, Rubicon Risk Advisory Services
As a corporate treasurer or risk manager, are you ready for the increased information demand that changing regulations will likely place on your time?
The present dynamic regulatory framework is changing the way companies are required to measure and report risks in their annual integrated reports. Statements attesting to corporate viability are required to be more detailed than previous ‘going concern’ opinions expressed by a company’s auditors. The risk management portion of the report has also moved from a general statement about risk awareness and management and expanded to comprise a large portion of an integrated report. Ironically, the reporting on risk relating to financial market variables, despite being well understood mathematically, has been less detailed in integrated reports, than say, the environmental report.
King III and the soon-to-be-released King IV Report on Corporate Governance evinces a transition from a tick-box approach to a more principle-based approach. The draft King IV report specifically mentions adopting an ‘apply and explain’ framework in implementing these principles as opposed to mindless adoption as if they were rules. Substance over form is the desired approach.
In addition, recent changes to the Corporate Governance Code in the UK require all UK listed companies to make a viability statement which is separate from and in addition to the going concern opinion. This statement requires that a company declare its viability over a specific time horizon, explain what variables were considered in the assessment, what time frame forward was looked at, and why the range of variables and the timeframes considered are believed to be appropriate. It’s foreseeable that a similar requirement will be implemented in South Africa.
These shifts in approach require companies to have deeper internal conversations about risk, and be more transparent about the risk impacts in their integrated report
As the custodians of this information the corporate treasurer and risk manager will be most affected by these changes.
Does this increased regulatory burden simply add costs to your company or does it provide an opportunity to enhance your company value?
Many companies view risk management functions as non-core and an imposed requirement. Added to this, a smaller company may have difficulty building the necessary redundancy into its risk unit, and could struggle to retain qualified staff. This can lead to risk being seen as a high-maintenance business unit which struggles to embed itself into the corporate culture.
It’s well understood that it’s beneficial to a company and its market value to have the best risk management processes possible.
EY research  reports that “companies with more mature risk management practices generate three times the level of EBITDA as those with the least mature risk management practices”. This research also found that financial performance is highly correlated with the level of integration and coordination across risk, control and compliance functions.
The recent release of the SARB report into the failure of African Bank points to an almost complete absence of risk management as one of the main causes of the failure. This doesn’t necessarily prove the premise that increased risk management increases company value but it demonstrates that at the extreme, the lack of risk management can certainly lead to the complete destruction of company value.
“Risk Management leads to a lower cost of capital and higher expected cash flows and, hence, to a higher firm value”: Siva Moodley, The South African Treasurer 2012
The incremental value accrued to companies with ‘more mature’ risk management is almost certainly relative, implying that to maintain the value differential, a company needs to constantly monitor its risk processes to stay abreast of latest trends and developments.
Companies that manage risk better, do better.
1.’The viability statement: Finding opportunities in the new regulatory challenge’