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Hong Kong executives warned to improve risk management

Hong Kong
2015-10-13 17:11

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Nine tenths of senior executives in Hong Kong recognize the value of risk management to their company however only two thirds build it into their planning decisions, finds a joint survey by KPMG and the Hong Kong Institute of Chartered Secretaries (HKICS). The report looking at the new normal in Hong Kong, surveyed 279 Hong Kong-based senior executives, assessing their awareness and preparedness to manage and oversee risks in the rapidly changing business environment.

Despite risk management being seen as a high priority among the companies surveyed, only 66 percent of respondents build it into their strategic planning decisions often or continuously, the survey finds. Just 36 percent had a fully developed, approved and implemented risk appetite statement. Additionally, 29 percent had no formal process to aggregate the overall risk exposure facing the business. However, the study also shows that boards in the region are stepping up and increasingly challenging management on risk issues, with nearly eight tenths of respondents indicating they plan to invest more in this area.

Jyoti Vazirani, Principal, Risk Consulting, KPMG China, says: “We have observed that companies in the region are continuing to invest more to develop their risk management and corporate governance. Board directors and senior executives are increasingly thinking about risks facing their organisations. Whether the intention is to avoid reputational scandals, deal with a challenging market in the region, manage investor expectations or simply comply with new regulations, the message is clear: risk management is finding its way to the top of the executive agenda, and it is here to stay.”

Executives are increasingly recognizing the challenge of managing external uncertainties faced by their businesses. Economic environment, regulatory changes, as well as growth and innovation are viewed as the region’s top risks, driving the fact that businesses need to be prepared for unexpected threats and opportunities. Almost three quarters claimed they increased investment in risk management over the last three years, and 79 percent anticipated a further increase in the next three years, the survey finds.
Maurice Ngai, President, HKICS, says: “We are increasingly seeing investors challenging boards with questions on their strategies and how they plan to execute these. This heightened shareholder scrutiny and investor activism is causing boards to deepen their engagement with the business and expand beyond their ‘traditional’ oversight role.” 

The survey also highlights issues about internal audit (IA). The new Hong Kong Corporate Governance Code requires, on a comply-or-explain basis, that companies set up an IA function. However, only 43 percent of respondents believe they have an IA function whose audits can be clearly linked back to the top risks facing the organization. Furthermore, 15 percent of organizations do not have an IA function in place.

A well-developed IA function can provide an organization with an opportunity to tighten its controls, reduce risk, identify potential inefficiencies and reduce cost, the report notes.  Vazirani adds: “The updated Corporate Governance Code and Corporate Governance Report for listed companies in Hong Kong is a significant step in bringing risk governance in line with more mature global markets. This new code places the board as a pivotal component of an effective risk governance framework and enhances its accountability with regard to risk management. Companies should therefore include discussions of risk, and oversight of the management of those risks, as a boardroom agenda item.”

While 90 percent of respondents said boards discuss risks for key decisions, only 43 percent have this as a standing boardroom agenda item. The survey finds that companies that have risk as a boardroom agenda item, compared to those which do not, consider themselves nine times more likely to have effective structures, roles and responsibilities to manage risk. They are more risk-aware and over five times more likely to identify emerging risks, also twice as likely to consider risk in business decisions. 

(Henry Wei)
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