RSS FeedBy M. Isi Eromosele
The role of risk management within global corporations has considerably changed in recent times. During the past decade, global corporations have factored in extra kinds of risks. These include operational risk, reputation risk and strategic risks.
Corporations can manage risks in two basic ways: one risk at a time or take a holistic approach where all risks are managed collectively. Corporations that manage their risks holistically tend to develop a long-term competitive advantage over those that manage theirs individually. For the holistic management of risks to be successful, the following overarching actions must be taken:
- Establish a process that measures the risks systematically throughout the enterprise
- Synchronize incentives for employees to achieve excellence in performance
When properly implemented within a global corporation, Enterprise Risk Management (ERM) produces value both at the worldwide level as well as the local corporate level. At the worldwide level, it enables the corporation to assess their risk-return tradeoff, guiding them to better utilize and manage the resources they have towards achieving their corporate business objectives. The benefits of implementing enterprise risk management at the local corporate level include the integration of risk management policies into the culture of the corporation. This helps to increase productivity and efficiency within the firm.
The value of a firm depends on its total risk. Cash flow is an important element of maintaining liquidity. When a corporation’s cash flow shortfall is too large, it affects the financial market’s expectation for its future growth. This would usually result in the lowering of the company’s market value.
A cash flow shortfall means that the corporation has inadequate funds in hand to implement forward looking strategies. It would have to either raise supplementary funds or reduce the scope of its planned strategy implementations. Raising added funds is expensive. If the firm has adequate debt capacity, it can issue debt.
However, acquiring debt to fund cash flow shortfalls is also very expensive. If the corporation possesses the best possible amount of influence preceding the shortfall, it has the option to raise mixed equity and debt to maintain the best possible amount of financial leverage. Firms that are forced to take the above actions sacrifice future growth and profits.
Through the appropriate management of risk, a corporation can anticipate and forestall the likelihood of financial shortfall that would inevitably affect their cash flow. A good way to achieve this is through hedging, which can help them eliminate their exposure to various risks in a cost-effective way. The firm could implement a foreign exchange hedging plan by using forward contracts, which would incur low transaction costs.
It is imperative that a corporation hedge the economic risks it faces if there any possibilities that it would encounter cash flow shortfalls which could force it to abandon planned growth projects. While the firm incurs little costs in hedging its risks, it raises the likelihood that it will be able to implement all of its development and growth schemes.
M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance
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