The risks of failure

Published on 24th May 2005

Everyday, millions of people walk in the investments maze and without doubt, they face many investment opportunities under their nose.  While some are roses sweet in scent, others are instinctively awful.  The trouble usually is knowing if the whiff of opportunity is for real or our nose is failing us. 

If the better share of your investment portfolio is in Kenya, you may be excited about the shares of companies like East Africa Breweries, The Barclays, Standard Chartered, Nation Media Group and other 3 digit traded shares.

Undoubtedly, the Kenyan market is thriving and so are other Africa’s shares in general.  You may however remember that Enron, Swissair, WorldCom, Andersen and Tyco were once big names in the financial market but they all came tumbling down one at a time when investor confidence was still at a 9/10 scale.  True to say, investor risk information is not always readily available.  Many shareholders mostly rely on flawed press briefings that are not so elaborate as to make one reach to a wise decision.  The end result usually is a frustrated investor who not only loses on investment gain but has also trodden backwards to a loner start. 

One may often wonder, “Isn’t risk just good?  I think it is because were it not for it what else would make a company’s shares more competitive?  Investing involves a lot of greed that’s why we get our way to the Nairobi Stock exchange despite its tardy growth.

In the common investment game, a lot of us long for risk free return on investment.  This is not possible and such opportunities only existed in government securities that are only limited to a certain income bracket and have lately been characterized by low yields.

The unavailability of adequate information is at most times attributed to strategic misdirection by executives, loss through occupational fraud and staff abuse.  An analytical survey by the Merrill Lynch found that the US firms were losing about 6% to occupational fraud and staff abuse estimated at $400 billion.  What would the situation be like for a country where the industries are less developed than those of the US?  At many times, the shareholders can only watch from a distance just because corporations are too big, the synergy amongst the board is too strong yet not existing between the board and shareholders.  Perot puts it thus, “…explaining the risk potential of a company to the board is like teaching an elephant to dance.” 

Locally, information on risk may not be readily available, as the state would only move in to investor protection at the near collapse.  Risk management strategies should be adopted and shared with investors by all companies.  If you ask most companies in Kenya whether they have ever articulated any risk management strategies, the answer is likely to be a no. 

For banks, risk will mostly be relative to the increased competition on loans, which for them is the major interest income earner.  However, the risk of piling bad and doubtful debts is inevitable.  Poor lending policies may also be attributed to risk threats in banks.  Companies should also be keen on industry changes as they may also pose threats.  The shift in return from treasury instruments have led to hard pressed banks that could at most times not easily find other sources or revenue.

Experts warn that there should be segregation of duty between compliance monitors, people who determine company’s policies and the risk management team. In this way a regular check would be maintained and risks worked on at an early stage.  It is also important that people involved in planning, and not the Asset Liability Committees know the risks faced by companies and the potential impact on their fortune.  Risks are industry specific and that is why it is important that a company structures product specific risk potentials and how to avert them. 

For businesses that require a large amount of risk capital, suitable metrics will include shareholder value analysis and the risk adjusted returns on capital.  A risk-adjusted lens helped one credit company understand, contrary to expectations that returns from new customers about whom it had little information were more volatile than returns from existing customers, even if the grips had the same expected customer value. 

The board should realize that numbers alone would only lead to short-term fulfillment of a company’s goals.  While the going concern is crucial, they should also invest on education in risk management and encourage the same in teams. 

Investment Risk Management is vital for any company whether at its maturity or not.  In the West, great strides have been made to integrate state of the art in its developed systems of risk management.  Financial leaders and the BASEL II have also played a great role by coming up with guidelines that equally apply to all parties.  As more ways are being explored, it is time Africa moved more swiftly, just as its previously untapped market now picks momentum. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


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