With the worse from the global crisis most likely still to come, companies need to review their risk management to make sure it reflects the new business reality.

The recent 20% decline in exports in December from a year earlier coupled with the dismissal of over 250,000 workers as of the end of January due to the weakening of demand from overseas serve us as a strong reminder that the worst of the global crisis may be yet to come to Indonesia.

In this environment, the best thing companies could do is prepare themselves for a rough ride in the near future by strengthening their risk management. After several boom years, the identification of risks, their measurement and the decisions related to how to handle them may be out of synch with the present business reality. Generous credit terms, over reliance on a few clients and/or suppliers and low levels of cash may have made sense during more prosperous times. However, currently they represent potential risk events whose likelihood of happening and potential impact may have risen significantly.

When companies all over the world are experiencing very difficult times or even going bankrupt, it would be wise to learn from their mistakes and do your best to avoid them from happening in your organization. New policies and procedures could be issued, better systems implemented and processes realigned to reflect the new situation. However, focusing on just the technical side of risk management will not be enough. If that was the case, Wall Street with its millions of dollars invested in risk management systems and infrastructure would not have collapsed.

Attention to the human aspects of risk management, its social side, is necessary as well. Ultimately, it’s the employees of an organization who will make the decisions that will impact the organization’s risk profile and chances of survival in the future. While businesses can survive and even flourish with good people and bad processes the opposite is not true. At the end of the day, risk management is about people.

This is the reason why the root cause of this global financial and economic crisis that we are currently experiencing is human, specifically it has to do with those individuals in top positions in Wall Street that were full of poor judgment, unrealistic sense of entitlement, excessive ambition and untrammeled greed.

This social side includes the following aspects: the risk culture and values of the organization, the education and training of employees, the setting of the right tone by top management and the alignment of incentives with risk adjusted goals and objectives.

Regarding culture and values, organizations should encourage people to have strict attitudes towards controls and procedures and a strong sense of accountability. They should also make sure that their members understand the risk implications of every decision that they make. Failure to do that will at best eventually result in employees’ actions causing embarrassment and reputational damage; at worst, those actions may jeopardize the continuity of the company as an ongoing concern.

In terms of education and training, all employees should have a basic understanding of risk related concepts such as: exposure (the total amount that could be lost), volatility (the deviation of actual results from the expected ones), likelihood (probability of an event happening), correlation (the interdependence between two or more things) and severity (the amount most likely to be lost if things go wrong). This knowledge would help them understand the risk related implications of their decisions and become more effective at making them.

As actions speak much louder than words, it is crucial for top management to make sure that everything that they do fully reflects the values and culture of the organization. People will not follow rules and procedures and stop considering the risk implications when making decisions if they sense that top managers don’t walk the talk.

Companies should pay for the performance that they want. Compensating employees using measures such as sales, market share or profit without considering the risks involved is not in the best interest of the organization. This policy may entice employees to take excessive risks to achieve their goals and get their bonuses regardless of the consequences for the business. A scheme that measures the performance of the employees using risk adjusted measures will align the interest of the individuals and the corporation. This will ensure that the company optimizes the revenue given the amount of risk that is taking.

In conclusion, with the worst of the crisis most likely still to come, companies should review and strengthen their risk management technical and social aspects. This action would allow them to make sure that both aspects reflect the new business reality. The alternative would be either crisis management, which is more expensive, time consuming and embarrassing or potentially, bankruptcy.