RISKY BUSI­NESS

EV­ERY BUSI­NESS FACES SPE­CIFIC RISKS, BUT THERE ARE SOME UNI­VER­SAL TRUTHS WHEN IT COMES TO AS­SESS­ING THEM

National Post (Latest Edition) - Financial Post Magazine - - CONTENTS - By Andy Hol­loway

Ev­ery busi­ness faces spe­cific risks, but there are some uni­ver­sal truths when it comes to as­sess­ing them.

There is risk in ev­ery­thing we do. There’s no es­cap­ing it. Just when you start to feel com­fort­able, bam, up pops some­thing un­ex­pected or, per­haps worse, some­thing you should have known was com­ing. Look at all the in­vestors who were lulled into com­pla­cency by ris­ing and rel­a­tively smooth stock mar­kets in North Amer­ica and then burned when the cor­rec­tion just about ev­ery an­a­lyst was pre­dict­ing ar­rived in Au­gust. The les­son learned, as ev­ery Boy Scout knows, is sim­ple: Be pre­pared.

Of course, there’s no way to pre­dict how things will turn out. Even gov­ern­ment-sanc­tioned mo­nop­o­lies or oli­gop­ol­ies, the most cov­eted of busi­ness mod­els, face plenty of risks, from gov­ern­ment changes to public opin­ion. Just ask Air Canada, which was pri­va­tized in 1988 and sub­se­quently had ma­jor prob­lems that led it into bank­ruptcy pro­tec­tion. Or ask On­tario’s Brew­ers Re­tail, the pro­vin­cial-backed mo­nop­oly beer re­tailer, whose for­eign own­ers have been forced to open their doors to the very same craft brew­ers that are eat­ing into their mar­ket share.

Risk, of course, largely de­pends on the in­dus­try, but gen­er­ally en­com­passes com­pet­i­tive, reg­u­la­tory, po­lit­i­cal and op­er­a­tional com­po­nents. That said, risk man­age­ment prac­ti­tion­ers say there are some broad rules that can help just about any busi­ness fig­ure things out. Gae­tano Geretto, founder and pres­i­dent of Pele­canus Strate­gic Ad­vi­sory Ser­vices Inc. in Toronto, even has de­vel­oped an acro­nym for it: IQM, which stands for iden­ti­fi­ca­tion, quan­tifi­ca­tion and mit­i­ga­tion. And, un­like in­vest­ing, past per­for­mance is key in pre­dict­ing fu­ture re­sults.

“Ac­tu­ar­ies some­times get ac­cused of liv­ing their lives through the rear-view mir­ror, but the re­al­ity is you need to go on past events,” Geretto says. “Think of all the ac­tu­ar­ies who use earth­quake data or cat­a­strophic events like storms or hur­ri­canes to get a sense of the amount of loss. You need some­thing to go on to serve as a bench­mark, but then you take in­for­ma­tion and tweak it a bit based on your cur­rent cir­cum­stances.”

Oth­ers in the in­dus­try fol­low a sim­i­lar path. Carol Will­son, an as­so­ciate part­ner in the risk prac­tice at Ernst & Young, says the first step is to un­der­stand an or­ga­ni­za­tion’s strate­gic, op­er­a­tional and busi­ness ob­jec­tives, which lends con­text to the risks that are then iden­ti­fied. She says it’s pos­si­ble for com­pa­nies to man­age risk on their own in an ad-hoc fash­ion, es­pe­cially if they have some­one ini­tially walk them through the steps. But best-in-class or­ga­ni­za­tions are mak­ing the process more for­mal and dis­ci­plined, even to the point of au­dit­ing to make sure the process has the rigour and dis­ci­pline in re­la­tion to ac­cept­able stan­dards, such as ISO 31000 by the In­ter­na­tional Or­ga­ni­za­tion for Stan­dard­iza­tion, and COSO 2004 de­vel­oped by the Com­mit­tee of Spon­sor­ing Or­ga­ni­za­tions of the Tread­way Com­mis­sion, an in­de­pen­dent pri­vate-sec­tor ini­tia­tive spon­sored by five pro­fes­sional as­so­ci­a­tions in the U.S.

A lot of how busi­nesses ap­proach risk is up to the risk tol­er­ance of their own­ers or ex­ec­u­tives and board. More risk, more re­ward, at least in the­ory. Geretto says the de­ci­sion for busi­nesses is sim­i­lar to the ones that peo­ple make in their own lives on a reg­u­lar ba­sis. For ex­am­ple, you will likely take out in­sur­ance when you buy a home — some­thing you have to do if you take out a mort­gage — but how much in­sur­ance is up to you. Hav­ing a $500 de­ductible will be more ex­pen­sive than hav­ing a $10,000 de­ductible, but you’ll have more peace of mind know­ing that just about ev­ery­thing that could hap­pen is pretty much cov­ered.

Like­wise, pro­fes­sion­als may want to take out li­a­bil­ity in­sur­ance if they are giv­ing ad­vice in case that ad­vice is wrong and they are held li­able for the re­sult­ing dam­age. En­trepreneurs can spread the risk of start­ing a busi­ness by get­ting more in­vestors. Of course, they would then also share

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