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Emerging Business Risks

There has always existed the ever-present possibility of an adverse event affecting the business performance. The business managers have for a long time focused on physical risks which could destroy the business assets such as fire or accidents. Development of insurance industry and products responded well to these risks and can now cover most of the risks associated with business disruptions. The other traditional risk is the loss of revenue through theft and frauds, mainly caused by weaknesses in internal controls.

This risk was quickly addressed internally through creation of internal audit departments. The external auditors further gave their assurance by confirming the Financial Statements presented the true and fair
view or otherwise. So why business failures while the most obvious risks have already been taken care of? The recent revelation of billions of Kenya shilling losses at the Premier Africa Airline, Kenya Airways and Uchumi Supermarkets Ltd revealed an emergence of new kinds of risks that need to be proactively addressed.

The two, have significant shareholding by the ‘taxpayers’ through the government which has invested public funds in them, they are significant to the country as flagship brands hence attract a lot of public sympathy when they are in financial trouble and the government is often obliged to dip into public coffers to rescue them. An analysis of the main causes of these business failures will help bring out the new risks that need to be managed. The two companies expanded their business operations at a very fast rate resulting into a case of putting the “Cat before the Horse”.

Today’s shareholder is interested in returns in both dividends and capital gains and not mere public
stunts in the name of business expansion. Kenya Airways “Project Mawingu” focused on acquiring bigger airplanes worth billions of shillings with a view of operating new routes in Africa, Asia and Europe. Unfortunately the expected business did not come through due to various factors which though unforeseen are not unlikely and should have been factored in the business formulation stage.

A ‘what if ’ approach would have advised a more cautious expansion. The Ebola outbreak in parts of West Africa, security threats due to increased terrorist attacks and downturn in tourism resulted into idle-capacity while the assets acquired through debt arrangements continued draining the limited resources. In 2014/2015 the Pride of Africa reported Kshs.25.7 billion loss and went further to report a half year loss of ksh.11.9 billion in 2015/16. Uchumi Supermarkets followed very much the same path by opening multiple branches in Kenya, Uganda and Tanzania.

It also reported a loss of Kshs.3.4 billion in 2014/2015. In both cases the management teams and
the respective boards were found to have been in place for over a decade resulting into complacency and ideology failure, they were seeking a quick and long term turn-around solution to the business. They were found in bed with their equally long serving auditors who dropped their guard as the friendship blossomed. This is the emerging business risk of incumbency and complacency that needs to be dealt
with by re-invigorating and implementing the corporate governance and ethics guidelines.

The first six years of a new management are usually coupled with a brilliant new vision, rebranding a new
strategic plan and noticeable turnaround in business fortunes. However, that where it ends and what follows is stagnation or downturn as the management rides on their past success ignoring the need for continuous innovation and creativity and instead resorting to publicity seeking opportunities often on redundant and moribund projects. Having steered their organization to success, the management
and boards realize that that they have limited time left and the only way, is out.

This is when they start asking themselves what can the organization do for me? They start going against every rule of corporate governance and ethics and most often engage in business with the firm as a
priority supplier either directly or through proxies resulting in conflict of interest. To overcome this normal curve denegation that, dictates the only way after the first five year cycle is down is to limit the term of the CEOs, the senior management and the board to a maximum term not exceeding six years (2 terms of 3 years each) Such a shift would result into the new management picking at the apex of performance and thus building onto the successes of the previous management instead of waiting to build the company
while it has degenerated into a ramshackle.

The auditors, advisors, consultants and other business partners should be rotated on a similar or shorter term in order to safeguard competence and independence. Business strategies that significantly alter the business model and which have huge capital should be implemented using a phased approach and should never be a ‘deep end dive’. As they say Rome was not built in a day, business success is a
journey rather than a knee-jerk reaction.This allows the business to monitor and evaluate results and come up with a midterm report on whether to retreat or go full hog with the strategy implementation based on some visible results rather than on unguided optimism.

The business stakeholders who include shareholders, boards, industry regulators including Capital Markets Authority, Government Ministries, the National Treasury , professional bodies including
ICPAK and the general public should be watchful when the same “drivers “ start becoming synonymous with the “vehicle” and when they seek support to implement capital intensive projects. This should
be a red light to conduct due diligence and ask hard questions on the projects viability and effect boardroom changes to encourage innovation and creativity.

A stitch in time saves nine; better late than never; prevention is better than cure. These were indeed well thought out sayings; that call for action now; this is a call to stop incumbency and deep end diving in the corporate sector and save shareholders and the public the pain of losses.


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