Report finds “major flaws” in risk reporting

A report has revealed major flaws in the presentation of risk analysis and mitigation by FTSE 100 companies, with many ignoring or downplaying the impact of pandemics or epidemics. This is despite an average of 187 epidemics happening around the world each year.

It also suggests that insurance brokers have failed to help these organisations prepare for extreme events and that specialist advisers suffer from fundamental biases.

Mactavish says its findings are unlikely to be limited to the FTSE 100 or the UK, but instead represent a global failure of risk management.

Its analysis of the annual World Economic Forum Risk Survey shows that while pandemic risks were top of the agenda in the mid 2000s they had slipped to the tenth-most severe risk by 2020. Instead, survey respondents focused on a range of environmental concerns that they believed were both more likely to occur and more damaging.

However, a complete lack of reference to pandemics and epidemics in so many FTSE 100 risk reports is alarming given that influenza pandemics occur every 10-50 years and the World Health Organisation records an average of 187 epidemic events each year.

Bruce Hepburn, CEO of Mactavish, said, “Despite our belief in the strength and professionalism of corporate leadership, understanding and management of risk is still immature at C-suite and boardroom levels. The reality is that risk assessment is far from an empirical process, all too often attitudes to risk are formed by last year’s crisis and this year’s headlines.

”Risk reporting should be a powerful tool to explain to investors how a company is protecting itself from the downside. Instead, they are often bland and backward-looking.”

Considering the World Economic Forum’s Global Risk Report, Mactavish found that while risks associated with pandemics have been given prominence in the immediate aftermath of historic outbreaks, they rapidly fall off the radar in ensuing years.

In addition, the firm draws attention to the unheeded advice of high profile business leader and former CEO of Standard Chartered Peter Sands who issued a whitepaper which suggested that infectious disease risks were underestimated and that some business leaders erroneously expected insurance to provide coverage when an outbreak did occur.

“Ultimately, risk has been an under-resourced function within companies that is too often removed from critical decision making,” said Hepburn. ”That, in turn, represents a lack of interest from boards and the institutional investors who appoint them.”

”While there has been much discussion from institutional investors about the concepts of stewardship and sustainability, too little of that focuses on real operational risks and too much of it could be described as ‘greenwashing’.”

Little or no reference

Mactavish analysed the annual reports of FTSE 100 companies that were published in the 2019 calendar year and found only 13 referenced pandemic or epidemic risks as material to their business.

Of those companies that had published reports at the time the analysis was conducted in 2020, 82 of 88 only now mention those risks, however, some of those companies believed that Covid-19 was a regional or national issue as late as March of this year. 

It found one FTSE 100 company did not mention COVID-19 at all in their report published at the end of March 2020, but put out an update on 3rd April 2020 stating that ‘the COVID-19 pandemic will impact our previous guidance for 2020’.

Another FTSE 100 company published their risk register in February 2020 and made only one minor change in the report to acknowledge the potential risks posed by epidemics when compared with the one it had published a year earlier. 

Bruce Hepburn said: “Given the frequency of epidemics and pandemics and some recent high profile ones such as SARs and MERs, I am shocked that so many FTSE 100 companies gave little or no reference to these when discussing the potential risks they face. 

“You also have to ask why this is, and insurance brokers and other advisers are substantially to blame. Brokers describe themselves as an integral element in their clients’ strategic risk management armoury. However, many are now too focused on sales and price-driven competition. Instead, if they want to maintain their role they need to take a genuinely strategic and empirical approach to risk. Brokers need to stay ahead of the curve but too many fail to do this, and the Coronavirus crisis and the impact this has had on businesses is a good example of this.”

Time to raise the game?

Mactavish is calling on board members and executives to ask themselves some searching questions about their attitude to risk management. Bruce Hepburn added “Those responsible for overseeing and managing companies should interrogate the empirical basis of their risk reporting in exactly the same way they might review any other area of corporate strategy. They should be looking at the flow of risk information within the company and seeking expert advice from brokers, consultants and specialists in the same way that they might approach entering a new market or adapting their supply chains.

They should also question the advice that they did receive. Did supposed risk experts, such as insurance brokers, raise pandemic risks and if not, why not? In recent years, brokers have repositioned themselves as ‘masters’ of risk in the broadest sense. They didn’t simply want to manage transactions on behalf of clients, but instead sought to carve out a more strategic role for themselves. Companies that have been paying for this sort of strategic advice will now feel that they’ve been wasting their money.”