Post on 04-Apr-2018
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Understanding Key Business Risks in a Challenging
Nigerian Business Environment
Franklin N. Ngwu (PhD, PIOR) Strategy, Finance and Risk Management
Email: fngwu@lbs.edu.ng
• What do investors want?
Matthew Hammond @ TBLI Conference Europe 2011- London - United Kingdom
Corporate governance is at the heart of investment decisions
Dharnesh Gordhon
What is a Risk
• A risk can be defined as anything that constrains an organization from achieving its objectives and aims!
• Types of Risk- Geopolitical, Societal, Economic, Environmental and Technological, Credit, Market, Legal, PEOPLE, Reputational, Foreign Exchange, Operational, Sovereign, Compliance
• Operational Risk is argued to be the fulcrum upon which the key causes and management of most other risks depends in a firm!
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Purpose of Risk Management
• Reduce cost of losses
• Reduce surprises
• Reduce capital allocation
• Ensure Business Continuity and Sustainability
• Key Issues in Risk Management-Risk Appetite,
Risk/Corporate Culture (The Board/Senior Mgt.)
• Organisational structure and Technological
infrastructure
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Risk Classification
• Macro Risks : Global, Regional, National
• External Risks: Outside the Firm
• Micro/Internal : Within the Firm
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Global Risks Landscape 2016
Top 10 risks in terms of
Likelihood Top 10 risks in terms of
Impact Categories
Large-scale involuntary migration Failure of climate-change mitigation and adaptation
Economic
Extreme weather events Weapons of mass destruction Environmental
Failure of climate-change mitigation and adaptation
Water crises Geopolitical
Interstate conflict Large-scale involuntary migration Societal
Natural catastrophes Energy price shock Technological
Failure of national governance Biodiversity loss and ecosystem collapse
Unemployment /underemployment Fiscal crises
Data fraud or theft Spread of infectious disease
Water crises Asset bubble
Illicit trade Profound social instability
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Categories of Internal Risk
• Internal Fraud
• External Fraud
• Employment Practices and Workplace Safety
• Clients, Products and Business Practices
• Damage to Physical Assets
• Business Disruption and System Failure
• Execution, Delivery and Process Management
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Risk in business: the next 20years 10
Negative GDP growth
(-1.7%)
2 016 wa s a v e ry t o u g h y e a r ( s o u r c e : F D C 2 0 1 7 )
Currency depreciation
(IFEM: 305.9 Parallel: 490)
High inflation (18.55%)
Oil production
shortfall ( 1.59mbpd)
Fuel scarcity &
subsidy removal
Release of Chibok
girls
Industry ratio of NPL up
30.65% (H1 ‘16) from 5.9%
(H2 ‘15)
40% wiped off All Share
Index (one of the worst
performing stock markets
in 2016)
L e a d i n g e c o n o m i c i n d i c a t o r s ( s o u r c e : F D C 2 0 1 7 )
LEI 2011-2015 avg 2016 2017
GDP growth (%) 4.72 -1.7 0.9
Labour Productivity growth (%)
0.58 -4.1 -1.9
Power (MW) (2014 – 2016)
3421 2920 4500
Oil Price ($pb; avg) 83.4 44.8 56.5
Oil Production (mbpd) 1.86 1.59 2
Trade Balance ($bn) 26.8 -6.1 -0.7
Net FDI ($bn) 3.2 1.6 1.7
External Reserves ($bn) 29.07 (end of 2015) 25.84 29
Exchange rate (N/$; year-end)
IFEM: 190.44 Parallel: 226.78
IFEM: 305.9 Parallel: 490
IFEM: 420-450 Parallel: 480-500
External Debt ($bn) 25.24 33.2 37.2
Inflation (%; year-end) 10.69 18.55 12.5
Avg. corporate profitability growth (%)
19.74 -17.4 ? Source: CBN,NBS, EIU, FDC Think Tank
Economic Activity: GDP YOY%
• Description: Gross domestic product (GDP) measures the final market value of all goods and services produced within a country. The GDP by expenditure approach measures total final expenditures (at purchasers' prices), including exports less imports. This concept is adjusted for inflation. The frequency is quarterly. Peer Average: 2.23
Economic Activity: GDP Per Capita
Peer Average: 21,532.45
Economic Activity: CPI
Peer Average: 4.27
Economic Activity: Unemployment
Description: The unemployment rate measures the percent of people without employment but actively seeking. Quoted monthly. Peer average: 7.72
Sovereign and Fiscal Risk: Debt
Description: Total Gross External Debt is made up of debt from 5 main categories, being General Government, Monetary Authorities, Banks, Inter-company lending and Others. Both long term and short term debt is captured, which includes Money Market Instruments, Loans, Trade Credits, Currency and Deposits and other Debt Liabilities. Peer Average 60.94
Currency Reserves (% GDP)
Description: Exchange Rates in IFS are classified into three broad categories, reflecting the role of the authorities in determining the rates and/or the multiplicity of the exchange rates in a country. The three categories are the market rate, describing an exchange rate determined largely by market forces, the official rate, describing an exchange rate determined by the authorities - sometimes in a flexible manner, and the principal, secondary, or tertiary rate, for countries maintaining multiple exchange arrangements. Peer Average: 62
Credit and Int. Rate Risk: 3 Mth Deposit Rate
Description: The annualized rate of interest that a bank will charge for lending or pay for borrowing a currency for a specific tenor. Peer Average: 4.09
EIU Banking Risk
Description: Banking sector risk gauges the risk of a systemic crisis whereby bank(s) holding 10% or more of total bank assets become insolvent and unable to discharge their obligations to depositors and/or creditors. The ratings are measured on a scale of 0-100. Higher scores indicate a higher level of risk. The scale is divided into ten overlapping bands: AAA, AA, A, BBB, BB, B, CCC, CC, C, D. For a more detailed explanation of our ratings system, please go to {eiu.com/crs}. Peer Average: 42
Political Risk Exposure: EIU Political Risk
Description: Political risk evaluates a range of political factors relating to political stability and effectiveness that could affect a country's ability and/or commitment to service its debt obligations and/or cause turbulence in the foreign-exchange market. This rating informs sovereign, currency and banking sector risks. The ratings are measured on a scale of 0-100. Higher scores indicate a higher level of risk. The scale is divided into ten overlapping bands: AAA, AA, A, BBB, BB, B, CCC, CC, C, D. For a more detailed explanation of our ratings system, please go to {eiu.com/crs}. Peer Average: 40
Govt. Risk: Control of Corruption
Description: Reflects perceptions of the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as 'capture' of the state by elites and private interests. Ranges from approximately -2.5 (weak) to 2.5 (strong). Peer Average: 0.38
Govt. Risk: Government Effectiveness
Description: Reflects perceptions of the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government's commitment to such policies. Ranges from approximately -2.5 (weak) to 2.5 (strong). Peer Average: 0.59
Gov. Risk: Regulatory Quality
Description: Reflects perceptions of the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development. Ranges from approximately -2.5 (weak) to 2.5 (strong). Peer Average 0.58
Govt. Risk: Rule of Law
Description: Reflects perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence. Ranges from approximately -2.5 (weak) to 2.5 (strong). Peer Average: 0.47
Business Env.: Ease of Doing Business
Description: The ease of doing business sector ranks economies from 1 to 183. For each economy the index is calculated as the ranking on the simple average of its percentile rankings on each of the 10 topics covered in the Doing Business Report. This sector covers the period June through May of the respective years. Peer Average: 57
Business Env.: Starting a Business
Description: The starting a business sector ranks economies from 1 to 183. For each economy the index is calculated as the ranking on the simple average of its percentile rankings according to procedures, time, cost and paid-in minimum capital. Peer Average: 75
Reasons for the Limited Outcomes
• Weak legal and accounting systems
• Lack of skilled regulators/ workers
• Complex bureaucracy
• Weak and unskilled enforcement institutions
• Relevant Reasons but not Sufficient!
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Characteristics of a Plural Society
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Characteristics of a Plural Society
• A society is pluralistic to the extent that it is structurally segmented and culturally diverse. In more operational terms, pluralism is characterised by the relative absence of value consensus; the relative rigidity and clarity of group definition; the relative presence of conflict, or, at least, of lack of integration and complementarity between various parts of the social system; the segmentary and specific character of relationship, and the relative existence of sheer institutional duplication( as opposed to functional differentiation or specialisation) between the various segments of the society (Van Den Berghe, 1964: 2) 30
Forms of Social Capital
• Integration= Intra-community ties
• Linkage = Extra-community networks
• Synergy =State-society relations
• Organisational integrity’= Institutional coherence, competence and capacity
• And
• The legal system- which one (formal or informal) ?
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Levels of Social Analysis
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_____________________
Frank H Stephen
____________
ESNIE 2003
Social
Embeddedness
InstitutionalInstitutional
EnvironmentEnvironment
GovernanceGovernance
Resource Allocation continuous
1 - 10 years1 - 10 years
10 - 100 years10 - 100 years
100 - 1,000 years
Adapted from Williamson (2000)
Legal System: The Fulcrum of Sustainable Growth
• English legal development appears as a historical continuum. There is no obvious rupture, no wholesale wiping out of legal wisdom of centuries and no division of the law into a pre-and post-revolutionary era. In English law the present is never completely shut off from the past and its historical roots are easily perceived (Caenegem, 1986:
8).
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Past, Present & Future
• Out of hard and bitter experience, Englishmen had come to learn that the remorseless, incalculable power of the past over the present was not to be dispelled by the strivings of a single generation. From 1660 onwards, England was never again entirely to forget that the secret of a nation’s strength is to have the power of the historic past behind it, not against it (Caenegem 1986: 158)
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The Firm (Divergent Interests/Risk Management)
• Shareholders- Higher Dividend
• Employees- Higher Wages and Benefits
• Government- More Tax and Compliance with Regulations
• Communities- More Corporate Social Responsibility
• Consumers- Low Prices, excellent quality products and services!
• All Stakeholders- Sustainable Business!
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Implications for Business
• Strategy and Risk Management
• Corporate Governance
• Human Capital Management (Recruitment and Retention)
• Context and Culture Matters!
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The Purpose of the Enterprise • Our guiding aspirations
The right playing Field where we will Compete • geographies, product categories, consumer segments,
channels, vertical stages of production (stage along the
value chain)
The unique Right to Win • Our value proposition
• Our competitive advantage
The set of Capabilities required to Win • Our reinforcing activities
• Our specific configuration
The Supporting Systems • Support systems, structures, and measured required to
support our choices
What is our Winning Aspiration?
Where will we Play?
How will we Win?
What Capabilities must be in Place?
What Management Systems are required?
The Strategy Process - An Integrated Cascade of Choices
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Strategy Outcome: Typical Nigerian Firm
The Problem…. 39
Actively Disengaged
Not Engaged Engaged
Nigeria 23% 65% 12%
Botswana 38% 52% 10%
South Africa 45% 46% 9%
Emerging market
countries
Developed market
countries
What will
be different
if they
were?
8/9 in 10
of people
you work
with are
Engaged
The Gallup Report 40
30% of employees are likely to be searching for new positions while at work 39% employers are concerned they are likely to loose top talent. 32% of employers reported that top performers left their organization 75% of employees who voluntarily leave their jobs are quitting their bosses
How can we Engage
with the WHOLE
EMPLOYEE?
Your Organizations Challenge 41
The Challenge of
Translating Strategic
Intent into Outcomes
What is the biggest
challenge that
Business Leaders
face?
Risk Management
Organizational Culture & Risk Management
• What does it mean ? Change Accelerator (competitive advantage) or Impediment
• The Components-(Micro and Macro)
• Who determines it ? (Board, Senior Management, Middle Managers, Junior staff)
• How do you Sustain, Expand and Benefit from it
• Role of the Board and Senior Management in creating and sustaining Organizational Culture
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Organizational Culture/ Risk Management
• Some of the main issues that impact on risk culture are:
Quality and integrity of staff;
Extent of change the organisation is going through;
Effectiveness of the control environment;
Reward practices
The Business Environment
• Favourable risk culture depends on ability of organisation
to develop positive attributes in a range of areas
• Especially the employees! (and other stakeholders) due to
divergent and conflicting interests
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The Risk Chain
Cause(s) Event Effect(s)
Resources
Reputation
People
Processes
Systems
External
Events
Human
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People Make it Happen 45
Skills & Behaviours Formal Structure of Work Relationships
Management Processes
Culture
Climate
Strategic Goals
Outcomes
CLIMATE
It is People, their thoughts, ideas and activities, that translate intent and goals into output.
Service
Innovation
Cost
Risk
What Kind of People & Team Work 46
Adverse Selection
Moral Hazzard
Why think or work
with others?
‘Two Heads are Better
than One’
Always?
It depends!!
HR as an Effective Risk Manager
• Risks of Asymmetric Information
• Recruitment Risk = Adverse Selection
• Productivity/Performance Risk= Moral Hazard
• Recession = Current/Emerging Risks
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Six inter-related stages of the risk
management process
Stage 1: Risk Strategy
Stage 2: Risk Identification
Stage 3: Risk Assessment &
Measurement
Stage 4: Risk Mitigation & Control
Stage 5: Risk Monitoring
Stage 6: Risk Reporting
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RISK MITIGATION PROCESS
TRANSFER Medium Risk
LF/HI
AVOID High Risk
HF/HI
CONTROL Medium Risk
HF/LI
ACCEPT Low/Medium Risk
LF/LI
Frequency/Likelihood (%)
Severity/Magnitude(£)
Four Types of Firms During a Recession
(1980-82, 1990-91, 2000-2
• Prevention- Focused Companies (Sony) (21%)
• Promotion –Focused Companies (HP)(26%)
• Pragmatic Companies (Staples) (29%)
• Progressive Companies (Target) (37%)
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STRATEGIES IN RECESSION
PREVENTION FOCUSED MOVES
PROMOTION FOCUSED MOVES
MARKET DEVELOPMENT
ASSET INVESTMENT
BOTH
EMPLOYEE REDUCTION
GOOD BAD WORST
OPERATIONAL EFFICIENCY
GOOD GOOD BEST
BOTH BAD BAD GOOD
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Culture, Strategy & People
• 1: Match Strategy and Culture
• 2: Focus on a Few Critical Shifts in Behaviour
• 3: Honour the Strengths of your Existing Culture
• 4: Integrate Formal and Informal Interventions
• 5: Measure and Monitor Cultural Evaluation
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Behind every Market
• Deeply Understand the Context
• Culture Matters!!!! (Key to Sustainable Growth)
•Thank You • 08147662821
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