Balancing risk and reward

Moore Stephens’ second annual Shipping Risk Survey has revealed that not enough companies in the shipping industry are following joined-up risk management procedures. Further, the overall level of confidence among respondents that sound risk management had contributed to the success of their organisations has fallen since last year.  

On a scale of one to 10, with one being low and 10 being high, respondents rated the extent to which enterprise and business risk management is contributing to the success of their organisation at an average 6.6, compared to 6.9 in last year’s survey.

Meanwhile, the extent to which enterprise and business risk is being managed effectively by their organisations returned a rating of seven out of 10, which is unchanged from last year.

Respondents believe that demand trends pose the highest level of risk to their organisations, closely followed by competition, and the cost and availability of finance. One respondent suggested that instead of relying on market reports, which are often uncertain, company-specific risk matrices need to be drawn up on the bases of experience, fundamentals and hindsight following evaluation of available market analysis.

Respondents added that the level of risk posed by most of the factors which impacted their business would remain relatively unchanged over the next 12 months. The only exception is tonnage supply and competition, which respondents said have the potential for increased risk.

The survey also revealed that senior management are less involved in mitigating risk at the highest level than they were last year, with 69% of respondents believing that the senior managers in their organisations had a high degree of involvement in enterprise and business risk management compared to 72% in the previous survey.

At the same time, twenty percent of respondents said that senior management’s involvement was limited to periodic interest if risks materialise. This is an increase from 18% in the last survey. Ten percent said that senior management acknowledged but had limited involvement in enterprise and business risk management, while just over one percent revealed that senior management had no involvement at all.

Internal control

For respondents, it appears as though the problems are internal rather than external. One said that shipping companies are not versatile enough, adding that while emerging IT is not a risk in itself, companies are too slow to adapt to changing needs and competition. Another noted that embedded derivatives are not being disclosed: “For example, bunker escalation clauses in contracts of affreightment are de facto derivatives, but I have never seen them disclosed separately,” they said.

The majority of respondents confirmed that risk was managed by means of discussion without formal documentation. A lesser percentage noted that risk was documented by the use of spreadsheets or written reports. Seventeen percent of respondents, compared to 13% last time, used internally developed software to manage and document risk, while 5% use third-party software.

Respondents deemed changes to legislation, and estimates of claims and provisions the most likely factors to result in a material mis-statement in companies’ period-end financial statements, rating both 4.2 on a scale of one to 10.

Strategy for success

Although the survey reveals that risk is being managed effectively within a high percentage of those organisations which participated in the survey, Michael Simms, partner at Moore Stephens’ Shipping & Transport division, says that it is disappointing to find that confidence in the level to which enterprise and business risk management contributes to the success of shipping organisations has fallen slightly in the past 12 months. So, too, has high-level involvement by senior managers, he adds.

“Shipping is a risky business, one in which an unwillingness to take any risk whatsoever sometimes represents the biggest risk of all,” he says. “But that does not mean that the industry can afford to ignore or underestimate risk. It must achieve the right balance between risk and reward, and especially so when reward levels are low, as they are at present. The rewards may vary, but the risk will not go away.”

Mr Simms continues that the shipping industry’s level of vulnerability is reflected in the diverse nature of the threats identified by respondents to the survey.

“Few other industries could claim to be exposed to risks arising from economic uncertainty, mis-diagnosed analyses, renegotiation of existing contracts, lack of financing, uncertainty over asset valuations, defaults on loan repayments, political sanctions, monopolistic policies, regulatory changes, falling crude oil prices, customer insolvency, fears over the Chinese economy, uncertainty in Europe – and not just as a result of Brexit, and plain old supply and demand,” he says.

Setting the tone

The industry has coped with what might be regarded as the ‘traditional’ risks associated with operating in the industry since the start of the worldwide economic downturn in 2008, albeit to varying degrees of success. But there is also a growing threat from extraneous factors such as cybersecurity and the increasing level of IT-related risk, adds Mr Simms.

He says: “The industry’s risk profile is changing, and with that the industry itself must change its approach to identifying risk. For some, outsourcing is a solution. However, managing risk of doing this must not be overlooked. If the risk is not recognised, it cannot be controlled.”

The key to identifying and mitigating any type of risk lies in the application of sound, firm-wide governance control systems, he says, adding that simply paying lip service to corporate governance will not do. “The tone needs to be set by senior management, leading from the front,” he says.

Mr Simms notes that a rating of seven out of 10 in respect of the level of effective management of risk at companies which participated in the survey is not too discouraging, but says that it needs to be higher, as does the percentage of companies which formally document the management of risk.

“Not enough companies are pursuing joined-up risk management procedures. Ultimately, the price to pay for inefficient management procedures, and the failure to monitor risk in a systematic and documented fashion, could be corporate failure,” he concludes.