Reducing risk

accawebmaster —  10 June 2010 — Leave a comment

by Jamie Lyon, senior manager – professional development, ACCA

Over the past few weeks in the US, you haven't been able to move for media coverage of BP's Deepwater Horizon oil spill.

Miles of the southern US coastline are covered in sludge and eco-systems have been severely disrupted; the oil slick covers an area roughly the size of Belgium. Thankfully, BP's attempts to cap the leak have been seeing some success in the past few days.

For BP, analysts estimate the company has already had to spend £1bn in its attempts to stem the flow of oil from its damaged pipe. The company's share price has fallen 35% over the past six weeks.

The damage to BP's share price has happened very quickly, but the implications of the crisis for the company's reputation and brand could have longer lasting and very detrimental effects.

It's not just BP as a company that's affected, but its wider shareholders too. The number of stakeholders with a vested interest in the activities and performance of an organisation like BP are vast – as the second largest constituent of the FTSE 100, any major movement on its share price will have a big impact on the performance of many invested funds, such as FTSE 100 trackers. This means millions of people who have invested in pension schemes or privately invested funds will be badly affected.

Of course, there is greater gravity still in consideration of the potential livelihoods ruined and the environmental fall out from the disaster.

The crisis puts into stark relief the difficulty of getting risk management right in such a big business. Low probability, high cost mistakes or misfortunes can be, by virtue of their very nature, very difficult to plan for or prevent.

BP's case highlights the catastrophic affect a single error can have. While the mistakes of small businesses may not lead to environmental disasters on the scale of BP's problem, those mistakes could still make small businesses ex-businesses. 
It is vital, therefore, for businesses large and small to take risk management very seriously. Effective risk management may not entirely rule out business-ending catastrophes, but it can help avoid the avoidable errors, and seriously limit the chances of the unexpected occurring.

For more on risk management, you may want to read ACCA's paper on ethics, corporate governance, and risk.


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