Warning on Failure to Manage Risk
A new survey from Moore Stephens has revealed that levels of sound enterprise and business risk management are currently satisfactory in the shipping industry. But the international accountant and shipping adviser warns that companies which fail to embed effective risk management procedures into their daily activities are likely to pay a high price in today’s tightly regulated and highly competitive industry.
The inaugural Moore Stephens Shipping Risk Survey, which will be updated annually, sought to gauge how effectively enterprise and business risks are being managed in the shipping industry and to analyze how key risks are being handled by companies. Respondents rated the extent to which enterprise and business risk management is contributing to the success of their organization at an average 6.9 out of a possible score of 10.0. Over a quarter of respondents returned a rating of 8.0, while almost three-quarters put the figure at more than 5.0 out of 10.0.
A third of respondents felt that enterprise and business risk was being managed effectively by their organizations, while 37 percent confirmed that such risk was managed by means of discussion without formal documentation. Overall, 42 percent of respondents noted that risk was documented by the use of spreadsheets or written reports. Internally developed software was employed by 13 percent of respondents to manage and document risk, as opposed to the 6 percent who used third-party software. Other methods cited by respondents as a means of managing risk ranged from “industry data” to “hope”.
One respondent noted, “We are highly focused, but a shipowner can only evaluate closely up until the moment when the ships are ordered or purchased. Once the bet is placed, Lady Luck takes a hand. The three most important things are timing, timing and timing.” Another said the best way to minimize risk was to “avoid known high-risk clients who could seriously affect the rest of your business.”
Some 72 percent of respondents felt that the senior managers in their organizations had a high degree of involvement in enterprise and business risk management, as opposed to the 18 percent who said senior management’s involvement was limited to “periodic interest if risks materialize.” While eight percent of respondents said that senior management “acknowledged but had a limited involvement in” enterprise / risk management, just two percent said senior management had no involvement whatsoever.
Demand trends were deemed by the greatest number of respondents (19 percent) to pose the highest level of risk to their organization over the next 12 months, closely followed by competition (18 percent). The cost and availability of finance featured in third place, at 13 percent, while operating costs and tonnage supply each figured at 10 percent. Other factors cited as posing a high level of risk included political and economic developments and international sanctions, cyber security, counter-party creditworthiness and technical breakdown. One respondent was convinced that demand for shipping would increase, but another was far less confident about the availability of competent crews to man the ships.
Respondents to the survey felt that the level of risk posed by most of the factors which impacted their business would remain largely unchanged over the next 12 months, with the exception of demand trends, the supply of competent crew and tonnage supply, which were perceived to have the potential for increased risk. Issues beyond the control of shipping also figured in the replies from respondents, one of whom emphasized, “Geopolitical issues will keep influencing the market economy, which will make business unstable and lead to lack of sustainability.”
Michael Simms, a partner in the shipping industry group at Moore Stephens, says: “It is good to see that respondents to the survey rated at almost seven out of 10 the extent to which enterprise and business risk management is contributing to the success of their organizations. It is encouraging, also, to see the healthy level of senior management involvement in the management of risk. But the figures need to be higher still for shipping to be able to claim that it is effectively managing risk to the best of its ability.
“You cannot take the risk out of shipping. It is part of the tradition of the industry, and one of the factors which attract investors. For too long, however, too many companies have failed to follow a joined-up risk management process, and insufficient resources and time have been devoted to risk management, creating difficulties and increasing the risk of business failure.
“Risk is only likely to increase in the shipping industry. Some of the risks are well-recognized and traditionally well-handled, such as those arising from competitive pressures. But other risks are of an emerging nature, such as cyber-security, while others still, for example the financial stability of counterparties, fraud and money-laundering, tend to fluctuate in their level of severity with market conditions and geographic location.
“Shipping cannot afford to under-estimate its exposure to risk. The banks, who are now starting to show a renewed appetite for shipping finance, and the private equity investors who have over the past two years or so filled the investment void created by the exit of more traditional shipping finance, will be looking to work with risk-aware shipping businesses, to ensure that their money is in safe hands. So, too, will counter-parties and other third-parties.
“Last year’s bankruptcy filing of Denmark’s OW Bunker set alarm bells ringing, attended as it was by references to major risk management and fraud losses and to unrecoverable credit. Shipping is also vulnerable to an increasing level of IT-related risk and is in some respects operating in a changed world and to a different risk profile - all this, moreover, at a time of increasingly stringent regulatory controls, which bring with them serious cost implications.
“Given the level of accumulated knowledge within the industry, and the continued increase in technological innovation, there is no excuse for shipping not to manage its exposure to risk. Companies which fail to monitor risk intelligently and systematically, to oversee the effectiveness of risk controls, and to embed risk management into their daily activities, are likely to pay a high price.”