The Effectiveness of Risk Management Implementation in Russian Companies

This study is dedicated to features of risk management implementation for Russian companies preparing to become public. Methodology approach is based upon the idea that the levels of company governance may create a strong value oriented risk management system, while the standards provide the matching of stock exchange requirements. We made the assumption that not all Russian companies are equally exposed to the risks, the level of exposure estimates by measurement of differences between the actual indicators BV, ROE, EVA and forecasted. Also the problem of effectiveness assessment of risk-management is unsolved. This paper is an attempt to fill this gap.


INTRODUCTION
Despite the prevalence of this vision of risk Enterprise-wide risk management usually considered mentioned that the problem of its effectiveness as the element of the Corporate Governance process that assessment is unsolved. Moreover, there is no single has a special mission to provide the most effective capital methodology of such assessment. The statistical data turnover and to increase market value of assets.
collected by international and Russian organizations The process of risk-management is of a dual nature.
(such as KPMG or Marsh) also does not help to elaborate In the short term, the mechanism of risk-management can the approach because it covers more the sphere of the risk help to avoid risks to a group of stakeholders. In the long management performance than the effectiveness. This term perspective it can diminish corporate value for paper is an attempt to fill this gap. shareholders. For example, the transfer costs of the next We also made ??the assumption that not all period will have a negative impact on the amount of Russian companies are equally exposed to the risks NOPAT. and to estimate the level of exposure is possible by At the same time, Enterprise-wide risk management is measurement of differences between the actual indicators the totality of coherent elements integrated into one BV, ROE, EVA and forecasted. process in which both CEO's and the staff participate in The literature review. The economic literature reviews revealing and managing potential risk factors.
revealed a tendency to define risk management as skills of Different standards demonstrate the variety of risk-managing both financial and non-financial risk management models (COSO, FERMA, ISO 31000:2009 aggregation. etc.), but the role of risk management for non-public In addition, the attention is paid to the integrated companies as the part of Business Administration process risk degree measured on the base of SNW, PEST and seems to be an opportune. This approach is based upon SWOP methodology and the final risk degree is only the idea that the levels of company governance may the software product result. So, the key problem has create a strong value oriented risk management system, not been solved and yet remains the problem of risk while the standards provide the matching of stock management effectiveness, but not of its implementation. exchange requirements.
This approach rises the problem of bureaucracy. management for non-public companies, it should be From all the companies which applied international One of the problems of risk management which standards the most successful are those that use their involves the everyday activity of a company is the own methodology.
integration of risk management techniques into the Furthermore, the existing risk-management standards process of corporate economic governance. provide an advanced model which is recommended to be It should be noted that the process of risk applied to an already existing management system. There management is about preserving money to cover one is a huge science discussion around the concept of risk group of risks, to insure others, to diminish a third one, or management of a company. The initial goal of risk to assume all the remaining risks. All this activity is very management in practice of financial institutions is very important, but also a time and money consuming process. simple-to reserve as much capital as it needs to cover any So, the main problem is how to integrate effective risk fluctuation in the market, to prevent losses and to keep management into a company's management process. interest of investors [1]. For the purpose of regulatory Which raises the question: "what is the most appropriate capital and banks' own economic capital is used some risk management system for the majority of Russian well-established risk, in particular Value-at-risk (VaR), that companies?" has become the industry standard because of its practical A recent study, the results of which are to be shown simplicity and a lack of agreeable alternatives [2,3].
in this article, revealed that the existing standards cannot The economic and managerial science literature be fully used by Russian companies because of large defines enterprise-wide risk management as a concept differences in legislative support; economic environment, with many definitions that are usually tied to particular implementation objectives and conditions, such as consultancy services or software products. Basically nontransparent financial systems. though an ERM system is a deliberate attempt to break Following the system analysis methodology we through the tendency of firms to operate in risk provide the next research logics: management silos and to ignore the enterprise risk, to First, we suggest, that the most demonstrative attempt to take risk into consideration in business measure of qualified risk management in the corporate decisions much more explicitly than has been done in the governance process is the positive difference between the past [4].
number of actual and expected key economic indicators, Professionals define the risk management concept as like Booking Value or Economic Value Added. We also the core activity designed to help organizations maximize have to conduct a research in terms of CEO's preferences the risk-adjusted return on capital whilst, at the same time in choosing key financial indicators as a measure of risk transforming uncertainty, which is unmanageable and management quality for Russian Companies. Using the immeasurable, into risk, which can be identified, assessed economic indicators helps to avoid special risk measures, and may be measurable.
like VaR, but helps to exam risk level of corporate A recent survey by management consultant Deloitte governance. states that enterprise-wide risk management "continues to Second: to design the most complete list of risks generate interest among risk managers. It seems intuitive those have influenced or might have a probable impact on that risk management might be the final "destination" for the core activity of a company. companies wanting to demonstrate advanced capabilities.
The existing theory provides a various toolkit of risk However, ERM continues to be an elusive concept that identification. The main goal of our methodology is to get varies widely in definition and implementation and the original information. To complete the definition of the reaching full maturity may take several years'.
term risk we provide a special methodology, based on Taking into account all these statements we will projection of business processes, areas of governance define risk management as one of the indispensable and management environment. This methodology has to function of corporate governance aimed at a sustainable, prevent formal approach in the process of risk identifying. trustworthy value oriented activity of a company. The Third: to organize the risk oriented corporate current research logic is based on this definition. governance by endowing each level of corporate Aim and methodology. Risk management is not well governance with authorities to manage exact risks. The developed enough in the practice of Russian companies, existing standards are oriented to creating a special risk even though it is consider to be a part of the Corporate department that detaches risk management from corporate Governance process. governance.
To improve our statement we studied random group four groups of companies. Medium-sized companies of companies, which have already implemented some risk focused on the domestic market are the most in need of management standard. Analyze companies already risk management implementation. This is because their implementing the international risk management standard core activities are most affected by fluctuations in the in their corporate governance process.
domestic market. What's more, the practice research helps to reveal the The results provided in table 1 are similar to the effectiveness of existing risk management practice. Also results presented by the Audit Director Roundtable in outlays of implementation in compare with further 2009 (Fig. 1). It was shown that the influence of risk probable growth of chosen financial indicators show the always has a financial result. Therefore non-financial risks effectiveness of management core activity.
can reduce the value of a company much more than Research results. Management of non-public financial risks. companies is interested in ERM implementation in The degree of influence of exposure in the company governance process issues because it is the necessary was also studied with an opinion survey of CFOs of element of managerial control. For such companies the several Russian companies. The degree of influence is methodology of risk management will be directed not only measured as the change in company value depending on at compliance with external requirements, but at the the group risk impact. The results are the following: improvement of the internal control and risk reduction strategic risks have the greatest impact (up to 65% in the measures such as NOPAT, FCF, Company Market Value, real sector of the economy and up to 53% in financial), Book Value or Carrying Value [5]. It is very important to financial risks are much less (16% in the real sector of the understand what the risks are that most affect a company economy and 26%-in the financial sector). which operates in the Russian market.
The next question is about the integration of a risk For the purposes of research, the traditional management system. The main purpose of such classification of risks is used. To get the results of the integration is to involve all the divisions of a company in questionnaire, 120 Directors of different Russian the risk management process and not to destroy everyday companies were interviewed. Venture Capital companies activity. were not included in the survey due to specificity.
The fullest representation of the risks can be The results of research reveal that companies can be obtained after having examined the mutual influences of classified into four groups as follows (Table 1). Risk the business processes on the areas of governances and groups are arranged according to the degree of influence the management environment. Four groups of risk are from highest to lowest. The differences in answers reveal formed as a result of this projection: Planning risks;

Procurement and Logistics risks; Production and Property
When we studied the organizational experience of risks and Trade Service risks. Each is influenced by the Russian companies, we revealed, that each administrative levels of corporate governance. The mutual influence on level is responsible for a certain group of risks. For the business processes in the areas of governances and example, the highest level-CFO's, takes strategic management environment allows managers to create the decisions. So, the quality of strategic decisions can be most complete picture of the risks. The suggested method measured by the positive deviation of the actual Book allows taking into account each of the sources of Value from the forecast Book Value. The next level-the risk volatility of non-public company revenues and expenses management department, is responsible for the risks at the [7, 8].
tactical level. This level is represented by a majority of the The research on the specific risks for Russian financial risks, legal and compliance risks. The quality of companies revealed the following dynamics, as shown in tactical decisions can be measured by the positive Fig.2. The dynamics in Fig. 1 is approximately consistent deviation of the actual EVA from the forecast EVA. with the dynamics in Fig. 2

. The comparison of dynamics
And the last level, managers in departments who are revealed that: responsible for operational risks, the quality of Strategic risk are the most influential in both cases, of the actual ROE from the forecast ROE. See this list of but strategic risk list less for Russian companies, risks as classified according to the level of management than for foreign companies.
presented in Table 2. List of operational risk is much broader for domestic The differences between actual and forecast figures market companies.
for a number of Russian companies are shown in Table 3.
The reasons for this situation are the following: according to the 2011 year. All companies listed in the economic uncertainty and the inability of implementation table are using one of the international standards of risk long-term planning; lack of effective internal controls management [9-11]. systems; poor corporate governance.
So, for some companies, such as Nomos Bank, To get an idea of how much a company is Tatneft, Inter RAO ES, RusGidro and others, the quality exposed to risk, can be obtained by comparing of risk management is not satisfactory at all levels of actual valuations with the expected value of the company management. These companies belong to the company. Deviations from the predicted value show group of Medium-sized companies focused on the the level of risk in the course of the company's current domestic market and , as we see, are candidates for the activity.
implementation of risk management immediately.
operational decisions can be measured by the deviation The high level of corruption in the country 2

This table represents the indicators and their deviations
Adverse government intervention in the regulation of business (tariff, regulation, etc.) 2 Adverse changes in the country and (or) international law 9 Tactical Risk Management Operational Lack of qualified staff 10 Technical risks at various stages of production 4 The sharp fall in the market price of the company's products 4 Various property risks, including business interruption 3 Significant disruptions of key equipment, raw materials, energy 3 A significant rise in the cost of transportation of finished products 1 Financial Currency fluctuations and (or) interest rates 3 The lack of liquidity associated with limited access to sources of loan capital 18  These companies do not have any adopted risk It is important to not allow risk management to run management systems, but most of them were formally the company, but only to support its good progress. The certified on formal grounds, which do not guarantee the division of the highest level of management into two parts quality of the risk management process.
(The Board of Directors and the Risk Committee) also The involvement of an external specialist helps to helps to prevent this problem. create a standard system of risk management. But, this A Board of Director's responsibilities include: the would not solve the problem of the low quality of risk adoption of risk management strategies; determination of management in the long term. The only way to establish acceptable levels of risk, monitoring of all value indicators good governance is the construction of a three-tier risk within the company and motivation for effective risk management system: management.
Strategically oriented at the highest level; and risks descriptions and monitoring; development of Tactically oriented at the middle level; enforcement procedures and VBM decisions. RM Operationally oriented at the lowest level.
implementation is not required by law for Russian A Risk Committee's responsibilities includes: threats companies however the creation of a Risk Committee does The practical contribution is in proposal to enable a sharp improvement in business efficiency.
restructure of a companies' management with its divisions Implementation of risk management entails costs. The at the strategic, operational and tactical level, that will Russian market does not have experts in the field of risk help solve the problem of effectiveness of risk management therefore company managers are forced to management. Furthermore, the results of the seek the services of the Big Four or Marsh. It is measurements show that the quality of risk management impossible to roll-out risk management programs without is not satisfactory at all levels of company management. any external assistance.
The suggested method of revealing risks allows to take The Questionnaire revealed the following results [12]: into account each of the sources of volatility of nonthirty percent of surveyed companies spent 350,000 euros public company revenues and expenses and to improve on the introduction of a risk management system, other the quality of risk management. did not specify the amount of expenses or wrote that they had spent nothing and considered risk management REFERENCES implementation economically unfeasible.