Successful projects ensure maximization of wealth to investors minimizes negative environmental impacts to the society and enables positive contribution to the community. The first step to achieving these goals requires the consideration of due diligence in business operations. Due diligence involves the identification and assessment of risk to ensure the viability of financial project. Therefore, risk management is an important function in business management that enables the achievement of due diligence (Sadgrove, 2008). Business are required to incorporate due diligence in their risk management processes because it present several benefits (Sprinkle, & Maines, 2010). Even so, most business chose not to do because of the costs associated with due diligence and risk management. Risk is usually defined as the likelihood that an identified event might occur leading to financial loss. In businesses, risk management focuses on financial risks, business interruptions, and safety natural hazards, social and environmental risks. Risk management involves the identification, estimation, and evaluation of risks, and ways to mitigate them or prevent them from occurring.
Source: (Sadgrove, 2008)
The benefits of risk management due to due diligence are provided in the following points
Risk management enables a company to avoid the certain costs and disruptions, which could lead to reduction in its market share. Additionally risk management helps companies to protect their reputation and public image.
Several businesses have had to incur costs associated with lack of proper risk management and this led to huge financial losses due to bad reputation (Sadgrove, 2008). Businesses should learn that the society is part of their environment and engaging in corporate social responsibility (CSR) should be a priority. As such, CSR should be viewed as a means of creating value and not as an additional burden or cost to the company (Ghoula, Guedhamib, Kwokb, & Mishrac, 2011). BP is one company whose market share was affected because of lack of proper environmental risk management policies. In 2010, BP suffered immensely after one of its prospects burst spilling oil estimated at 4.9 million barrels in the Gulf of Mexico. In this case, BP had to pay $18.7 billion to the stated affected incurring huge financial losses. The chart below shows how BP’s stock has never recovered since the spill in 2010. Volkswagen is also on the same path as BP after it was accused of misreporting about its carbon emission last year. All these fines and litigations can be avoided if companies have proper disclosures and risk management policies.
Chart 1: BP Oil Stock Prices (2010-2015)
Source: (Haslett, & Ehrenberg, 2015)
The management of health and safety and operation risks helps companies to avoid litigations from workers and clients and reduce insurance premiums.
Businesses are responsible for ensuring that their employees’ working environment is safe. Companies pay insurance for their employees to ensure that they are covered in the event any risks associated with their job occurs. Businesses should learn that taking care of employees adds value to the organization in terms of engagement (Byiers, & Bessems, 2015). Operation risks should also be considered to enable businesses avoid litigations associated with them. Litigations arise because of non-proper disclosure by businesses about their environmental activities and risks. According to CNA Insurance statistics, most of the lawsuits against companies are related to employment practice liability with 75% of the cases being employment disputes (GEA Staff, 2015). Research shows that the costs of employees turnover can be reduce by nearly half if CSR is adopted because it ensure the retention of high skilled employees. If an employee earning about $100,000 is retained, CSR suggest that the benefit could translate to $400,000 (Sprinkle, & Maines, 2010).
Managing risks through due diligence assists businesses to have improved strategic planning and ensure compliance.
Risk management and enhanced due diligence assist the organization in decision making and planning. Several businesses have been accused of non-compliance and other unethical practices, which have amounted to lengthy lawsuits and hefty fines. The costs of non-compliance have been high for companies that have been found guilty. Business can avoid such costs of non-compliance by engaging ensuring that they are responsible in the operations. Business responsibility involves ensuring that all stakeholders’ rights are not violated. Some of the areas businesses have been non-complaint include payment of taxes and disclosure of revenues. Tax evasion especially through overseas has been an area that has cost the reputation of several businesses such Google (Houlder, 2015). In 2015, HM Revenue & Customs in the U.K and IRS in the United States reported an increase of approximately 30% of business convicted for tax evasion.
Risk management helps organizations to reduce legal liabilities, operational costs and protects resources resulting to maximum shareholders wealth in the end.
The employment of risk management practices assists business to reduce operational costs. Assessing risk enables management to come up with strategies that would help minimize any operational risks from occurring. In the process of managing risk, managers can identify cost effective methods of doing business. For example, Intercell in Poland managed to reduce its hydrogen sulfide emission by 70% when it installed an equipment that reduced water use by 7%. The company installed the equipment with the aim of reducing it $2 million annual fees relating to discharge permits and penalties (Prakash-Mani, Thorpe, & Zollinger, (n.d.). Therefore risk assessment and evaluation can help management come up with ways that would reduce operational costs and increase profits.
Businesses should apply risk management practices to ensure they protect the environment.
The rise in climate change has been associated with both human and natural calamities. Businesses processes have often been associated with pollution and emission of gases that are harmful to the environment. As such, governments have taken actions requiring all companies to report on their activities and emission. Additionally, businesses are required to engage in activities that would protect the environment.
Graph 1: Global Carbon Emissions from Fossil fuels 1900-2011
Source: (Boden, Marland, & Andres, 2015)
The graph indicates the significant increase in gas emission for the years mentioned respectively. This indicates that business and human activities are becoming more polluting. Therefore, safe practices should be identified should be identified through research and innovation to ensure that the environment is protected. Businesses such as Volkswagen, which have been accused of wrongful disclosure of emission, should be fined heavily to ensure that ethical practices are maintained. Recently, Mexico also accused the company and demanded $8.9 fine for the emissions scandal (Zhang, 2015).
Companies with effective risk management practices are able to identify potential risks and define insurance needs.
Insurance is a cost that has been associated with risk management and several businesses have ended up paying huge premiums due to lack of risk assessment (Sprinkle, & Maines, 2010). There are common risks that occur and businesses that require insurance so that in the even they occur businesses can be compensated. However, certain unique risk could also occur in different risks, which depend on operations, size, location, and nature of customers. Therefore, risk managers should be able to assess the environment and recommend on the right insurance that the business could take up.
References
Boden, T.A., Marland, G., & Andres R.J. (2015). Global, Regional, and National Fossil-Fuel CO2 Emissions. Carbon Dioxide Information Analysis Center, Oak Ridge National Laboratory, U.S. Department of Energy, doi 10.3334/CDIAC/00001_V2015.
Byiers, B., & Bessems, J. (2015). Costs if you do, costs if you don’t Promoting responsible business & reporting - challenges for policy makers. Swiss: ECPDM Org.
GEA Staff. (2015). Employment Related Lawsuits: High Risk, High Cost. Retrieved from http://georgiaemployers.org/employment-related-lawsuits/
Ghoula, S., Guedhamib, O., Kwokb,C., & Mishrac, D. (2011). “Does corporate social responsibility affect the cost of capital?” Journal of Banking & Finance, 35(9), 2388-2406.
Haslett, E., & Ehrenberg, B. (2015, July 3). One chart showing how BP's share price never recovered from the Deepwater Horizon disaster. CITYA.M. Retrieved from http://www.cityam.com/219401/one-chart-showing-how-bps-share-price-never-recovered-deepwater-horizon-disaster
Houlder, V. ( 2015, December 14). HMRC steps up tax evasion drive after 58% rise in convictions. FT.COM. Retrieved from http://www.ft.com/intl/cms/s/0/4ff76fa0-a030-11e5-8613-08e211ea5317.html#axzz40PxP0yXp
Prakash-Mani, K., Thorpe, J., & Zollinger P. (n.d.). Developing Value: The Business Case For Sustainability In Emerging Markets. IFC. Retrieved from www.sustainability.com/developing-value
Sadgrove, K. (2008). The Complete Guide to Business Risk Management. New York: Gower Publishing, Ltd.
Sprinkle, G., & Maines, L. (2010). “The benefits and costs of corporate social responsibility”. Business Horizons, 53(1), 445-453.
Zhang, B. (2015, September 21). There's no way Volkswagen will pay the US $18 billion in fines for cheating on emissions tests. Business Insider. Retrieved from http://www.businessinsider.com/theres-no-way-volkswagen-is-going-to-pay-the-us-18-billion-in-fines-for-cheating-on-emissions-tests-2015-9
