Conference Board findings: Indian firms slowly embrace risk management, but most efforts are defensive, not strategic
Intense global competition and rapid growth are forcing Indian firms to examine corporate enterprise risk management (ERM) elsewhere, especially in Europe, Australia, and North America, where the process is more mature, concludes a report by The Conference Board .
ERM is a cohesive, enterprisewide process allowing companies to identify, assess, and respond to the social, political, and economic risks of doing business. The study, sponsored by KPMG and SAP India , examines the state of risk management integration in companies based in India, and includes case studies of four India-based multinational firms: Tata Motors Ltd ., ICICI Bank , Tata Chemicals Ltd ., and Dr. Reddy’s .
“ERM is in the very early stages in India,” says Matteo Tonello, senior research associate at The Conference Board Governance Center, and a coauthor of the report. “As Indian firms expand beyond national borders, they become exposed to more strategic and operational risks, including those from different geopolitical and cultural contexts. Tightening capital markets, the internationalization of successful Indian companies and the adoption of global initiatives to promote business integrity are forcing many firms to pay attention to recent developments in risk management around the globe. Assimilating international standards of risk management is becoming a necessity to remain competitive.”
ERM as competitive edge
Since 2004, The Conference Board has documented steady progress to drive ERM into corporate practice and culture. Major progress is detected in early stage efforts, such as creating a risk inventory and adopting a cohesive set of assessment processes. Companies headquartered in Europe or operating in major Asia-Pacific financial markets have advanced significantly in recent years and developed processes at a fast pace, indicating an international consensus on the benefits of risk management integration.
“The four companies examined closely in this report are more of the exception than the rule in India, where ERM is not widely used as a management tool,” says Ellen Hexter, director, Enterprise Risk Management, The Conference Board, and coauthor of the report. “However, experience and research from other parts of the world show that those who are early adopters of ERM are likely to enjoy a competitive advantage.”
For many Indian firms, most risks continue to be managed in silos, whether in business units or functions. Indian companies generally do not take a comprehensive approach that ERM embraces. But that is beginning to change, notes the report. Now that outsourcing has matured, it is no longer limited to single functions within specific business units, but involves entire corporate processes. As a result, risk and governance issues surrounding outsourcing practices means they need to be addressed at the organizational level.
Part of the cultural change that ERM brings is the understanding that it can help identify opportunities, and their associated risks and rewards. ERM also creates greater transparency both internally and externally within companies that have embraced it. Communication improves by adding a new perspective on risk and sharing risk information. Communication with shareholders and other external stakeholders also improves through more thorough disclosure.
The international community is putting pressure on the Indian government and its enforcement institutions to tighten their grip on fraud, corruption and other illegal business practices. Companies are beginning to recognize the importance of formal anti-fraud and anti-corruption policies and the need to closely monitor business operations. A comprehensive risk management program would ensure that these protocols are implemented throughout the company.
“The value proposition for ERM is not yet evident for most Indian companies,” says Hexter. “Most companies and boards that have begun ERM are doing so more as a compliance exercise than a strategic one. Unless and until companies can begin to recognize value to forward-looking risk management, ERM will not become part of everyday business practices.”