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Missing the Big Picture on Risk

10/03/2016


Anxiety has returned to Canada’s real estate and construction sector. After several years of feverish activity, prime land and development opportunities are now in short supply. Costs are rising, as provinces and municipalities raise fees and charges to help tackle their own debt challenges. The ongoing slump in the energy sector has brought the country’s former economic engine to a shuddering halt—taking Alberta’s real estate market with it.

Clearly, Canada’s real estate and construction companies are heading into choppier waters. To chart a course through these turbulent conditions, companies need to fully understand the risks facing their entire enterprise—yet many lack the necessary framework to enable them to do so. Without a proper Enterprise Risk Management (ERM) framework in place, these firms risk being blindsided by a hazard they never saw coming.

Managing risk with tunnel vision

Real estate and construction firms manage risks every day, of course—but all too often they do so at an operational level, reactively and independently. They do so because their organizations are structured in discrete silos that inevitably focus managers and staff on their part of the business. Plans, metrics and incentives reinforce this tight focus, inadvertently providing a disincentive for reaching over silo walls and across the enterprise.

Looking at risk through a “silo mentality” lens can severely hinder a company’s ability to recognize how individual risks connect to, influence, and are shaped by other risks elsewhere in the business. Management teams struggle to understand how their risks intersect with their strategy, leaving them unable to make informed decisions on how to adjust the strategy to mitigate risks or optimize opportunities.

Taking a narrow, siloed view of risk can also mean companies overlook important risks that slip between silo walls, yet could affect the entire business. Procurement issues could slow or stop projects and result in missed deadlines. A tenant bankruptcy could spark a domino effect that puts huge pressure on revenues. A governance slip could cause reputational damage that, in turn, creates problems in obtaining financing or attracting new business. Without a means to identify, assess and manage risks from an enterprise-wide perspective, real estate and construction companies are vulnerable to sudden—and potentially severe—shocks to their business.

Companies need a better view of the risks they face. Those that persist in managing risks in an ad hoc, disconnected manner may soon find themselves outmanoeuvred by competitors who are better able to foresee threats and respond to a shifting market.

The case for Enterprise Risk Management

To succeed in an increasingly turbulent market, real estate and construction companies must be able to see all the risks they face, from the immediate and obvious to the shadowy ones on the far horizon. An ERM framework can provide the “widescreen” perspective these organizations need, yet all too many lack.

An ERM framework offers companies a structured and disciplined process that pushes them to consider risks from every angle, not just the narrow perspectives of their business units. Approaching risks on an enterprise-wide basis—rather than in isolation—encourages communication and knowledge sharing across the organization. As a result, companies gain a much more complete understanding of their risks and the potential impact of those risk on the business. As well, they can draw much clearer connections between their business strategy and the risks they face.

Once risks are identified, companies can then take steps to assess each risk, prioritize them, develop mitigation plans and set in place processes to monitor top risks on an ongoing basis. Using an ERM framework focuses the entire organization on the risks that really matter to the business as a whole—rather than being distracted by trivial risks that pose little threat to the business.

ERM is about managing risk—and improving performance

ERM isn’t just about managing risks, though. Done effectively, ERM enables companies to improve their performance as an organization overall. ERM can, for example, help organizations uncover inefficiencies in business processes and poor—or missing—controls. Most importantly, however, is that an ERM framework opens vital lines of communication across the enterprise, allowing staff to collaborate and share information and insights much more effectively. This helps overcome the silo mentality that prevents so many organizations from operating as one business, rather than as a collection of smaller business units.

A number of organizations, recognizing ERM’s role in driving better performance overall, have actually moved the ERM responsibility out of its traditional home in Internal Audit and into Operations. Wherever organizations choose to house it, they should regard ERM not as a kind of auditing tool—a means to inventory and acknowledge risks—but as a means to facilitate ongoing dialogue about strategic, financial, operational, technological, people and other business practices and how to improve them.

Are Canadian real estate and construction companies ready for ERM?

Many real estate and construction companies describe themselves as risk-averse. Yet in practice, this often mean companies simply aren’t dealing with risks. Ironically, being risk-averse in this way leaves organizations exposed to even more of it.

Implementing an ERM framework requires company leadership teams to be able to take a long, hard look at the risks they face. It also requires a willingness to investigate the root causes of those risks—and change even long-standing business practices in order to minimize or mitigate them. In some cases, an enterprise-wide risk assessment can shift an organization’s targets or business strategy overall. The company may discover it’s over-invested in a particular market or property type, for example; addressing this concentration risk could prompt a move to diversify into new regions or subsectors.

To understand how managing risks can shape a company’s business objectives or overall strategy, the organization has to have a clear picture of what the strategy and objectives actually are. Even in our own experience working with clients, we’ve seen risk assessments transform into strategy- and objective-setting projects: the organizations needed to understand what they were trying to achieve before they could think about the risks they face.

ERM: Key success factors

A clear understanding of the company’s strategy and objectives, the capability to confront risks head-on—and a willingness to change the business strategy if necessary—are all essential to managing enterprise risk effectively. But they’re not all that’s needed to successfully introduce ERM to an organization.

  • Lead from the top: ERM must be owned and championed by the executive team. It’s a strategic, enterprise-wide initiative that demands communication and collaboration from all parts of the organization. It can’t be led by middle management.
  • Establish a well-defined risk appetite: Organizations need to understand how much risk—and what type or risks—they’re willing to accept to achieve a desired outcome. If there’s no answer to that question, it’s a discussion that needs to take place.
  • Make sure risk is part of every strategy discussion: All too often, companies fail to bring risk into the conversation around business strategy. This has to change. Organizations need to deliberately incorporate a discussion of risk—and the challenges and opportunities risk creates—into their strategy meetings. As well, firms must ensure that the strategic planning process measures risks in a manner similar to how objectives are measured.
  • Don’t let outside advisors lead the ERM project: External advisors bring invaluable experience and expertise to an organization’s ERM implementation. But advisors shouldn’t lead the project overall or make key decisions on the company’s behalf. Management must own—and lead—the ERM project, collaborating with the outside advisors to ensure the ERM framework is tailored to their specific, unique needs.
  • Customize your risk program to fit your business: One size does not fit all. Your risk management program needs to reflect the nature, size, complexity and culture of your organization. It must also be designed to embed itself within existing processes to better meet your business objectives, maximize effectiveness and mitigate risks.

It’s time for a wider perspective on risk

Canada’s real estate and construction companies are facing a more turbulent future. It’s never been more important for firms to understand the current and emerging risks that could affect their business in the short, medium and long-term. Yet too many companies continue to address risks from the narrow perspective of their organizational silos. Risks are being missed, and any one of them could jeopardize a company’s success. To help prevent this, real estate and construction firms must take steps now to ensure they can understand, assess, prioritize, manage and monitor risks across their entire enterprise. An ERM framework can enable them to achieve this while improving performance throughout the organization. Implemented well, true risk management—across the enterprise—will help companies avoid big mistakes, big surprises and missed opportunities.

This is the second in a series of MNP perspectives on risk management aimed at Canada’s real estate and construction companies. Subsequent publications will explore fraud risk and restructuring and insolvency risk.

​For more information, contact Gordon Chan, CPA, CA, CFE, CRMA, National Enterprise Risk Services Leader at 403.537.8429 or [email protected]​ or your local Enterprise Risk Services advisor.