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Will Risk Appetite Weather The Covid-19 Storm?

8 July 2020 – Enterprise risk management is in its nature intended to manage risks of an organisation holistically, writes IRMSA Member Lindiwe Magobholi. It is a reality that for many years enterprise risk management has struggled, with some organisations still battling to keep its seat at the roundtable, because although it is not a profit centre function it sometimes behaves as one.

It is seen as a value add as opposed to being a contributor to the bottom line. Risk managers have been putting policies in place to ensure that organisations are resilient whilst achieving their strategic objectives. Simply put, optimising risk for reward.

Scenarios are developed in order to set risk appetites to safeguard the business from any known event.

The most difficult questions any risk professional faces when managing risk appetite is:

  • What will cause that situation?
  • Why would it happen?
  • Why should we worry about an “imaginary” situation?
  • Why should we do anything about it?

It is difficult to make these business stress-scenarios stick because “business as usual” assumes that the sun will rise in the east and set in the west, and that all will be fine at the end of the day.

By nature, people are optimistic – rightly so. But it is our job as risk managers to be pessimistic and think of the “out of the ordinary” or “black swan” or “outliers” situations and manage the business against these risks while harnessing the opportunities therein. The objective is to ask,

  • Does the business have an appetite for these risks?
  • Can it treat or tolerate it?
  • Is the business well capitalised to survive a crisis?

Sadly, there aren’t many events in history such as COVID-19 that businesses can stress-test risk appetites against and it therefore remains mainly academic in nature.

As we were enjoying the new year, COVID-19 had started to wreak havoc in other parts of the world, and I wonder if we as risk professionals, were already paying attention to the pandemic and what conversations we were having in our emerging risks discussion with oversight committees.

Did we imagine this wave ever reaching our shores? Certainly, the COVID-19 wave hit the shores of the Republic and President Ramaphosa declared a nationwide halt on all economic activities. As Professionals, we had to act on our feet while hiding in our homes with our children in fear of our lives and as the proverb goes “the rest is history”.

Like Joseph`s dream in the good book of life the seven years of famine are here and therefore Joseph’s emergency plan/fund must be activated, and like anything in life, the emergency plan goes through gruesome tests.

As the media reports highlighted recently, it is very clear that many businesses are not resilient enough to survive the pandemic. As businesses were mandated to close in an endeavour to prevent the spread of the virus and only essential services were permitted to continue to provide much-needed services, we witnessed most businesses:

  • Struggling to pay rent in shopping malls;
  • Struggling to pay employees’ salaries;
  • Reducing staff complements; and
  • Unable to open their doors and resume with trading indefinitely.

Without a doubt, the economy was the hardest hit. It’s a fact that, the hard lockdown lasted for 5 weeks of “limited or no trade” and many businesses will not survive this pandemic.

The South African Television News channels ENCA and Newzroom Africa ran a story on the 10th June 2020, indicating that business confidence fell to its lowest in 45 years, with all economic indicators signalling a crisis.

The South African government introduced a Relief Fund to provide relief to those that are hugely impacted by the pandemic, the SARB relaxed its liquidity requirements and the financial services sector pledged to assist the economy with debt-relief measures including credit life cover, and yet all these measures are proving not to be enough.

According to Statistics South Africa, by the end of 2019 the country was already in a technical recession.

The pandemic is unprecedented and no one could have foreseen its impact but consequently, it was very evident the one month of “no trade” was catastrophic for most organisations or those that had reserves for less than a month to survive. It begs the questions:

  • How did we set our risk appetites in the first place?
  • What benchmarks did we use?
  • Are our policies addressing the critical/survival issues for our organisations?
  • Are we having critical discussions at the roundtables?
  • Are we really risk managing the business?

After COVID-19, it is clear our risk management discussions should ease up because a practical stress (even stretched) scenario has manifested, and accordingly we should have treatment strategies for our businesses and reserves.

Everyone at the roundtable should always consider the impact of a business failure on the most vulnerable citizens of this country – because that is a picture of a country that cares about its people. This pandemic has reminded us that in life, winter will always come, and we must be prepared for it. Source (Futurewave)