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Deloitte chief says globalization has increased exposure of corporations beyond financial events

William G. Parrett, Chief Executive Officer, Deloitte Touche Tohmatsu (Deloitte), today told attendees at the World Economic Forum that the importance of risk management for corporations around the world has risen dramatically since 9/11 and that new approaches will be necessary if businesses are to ensure sustainability in the face of an ever widening spectrum of possible threats.

Citing an ongoing Deloitte study, Mr. Parrett indicated during a WEF panel session that far too many companies still define the threats they face too narrowly and remained focused primarily on addressing only financial risks.

"One effect of globalization has been that risk of all kinds -- not just fiscal, but also physical -- have increased for businesses, no matter where they operate," said Mr. Parrett. "Information travels far and fast, confidentiality is difficult to maintain, markets are interdependent and events in far flung places can have immense impact virtually anywhere in the world. A broader framework for defining and managing the variety of risks will be necessary if corporations are to mitigate the threats they face, assure sustainability and deliver value to their shareholders."

A prime recent example of the new risk paradigm is the possibility of an avian flu pandemic, Mr. Parrett said. Despite higher awareness of business continuity issues in the wake of 9/11 and other unimaginable events, a recent study of U.S. companies cited by Mr. Parrett found only 14 percent of respondents who would say they were adequately protected should a pandemic strike. A further 73 percent said they lacked understanding of what they should do to prepare. Yet clearly, Mr. Parrett pointed out, a major outbreak could cause major disruptions at the enterprise level for thousands of businesses, their suppliers and vendors.

The ongoing study of business leaders also uncovered four considerations that are top of mind, as they review and upgrade security and risk management, including:

  * fostering a holistic and integrated risk management culture that features a chief security officer and that extends across the entire organization;
  * imagining the unimaginable, incorporating into risk positions the potential impact of low probability events and adding "stress test" models to risk-evaluation tools
  * appreciating the significance of anti-western sentiments, recognizing that corporations are on the frontlines of global influence and outreach; and
  * identifying best practices as they emerge and putting in place the planning, analysis, monitoring and human resources necessary for their implementation.

Mr. Parrett emphasized that the new risk management climate has given chief executives and corporate boards added responsibility, as the cost of unlikely scenarios, should they occur, could be extremely high, with the complete failure of a company a possibility in the most extreme cases.

"Clearly, there are additional expenses in defining risk more broadly and extending preparedness to address more possible events, but such an expenditure should be viewed as an investment that can reap great rewards when the unforeseen or unexpected happens," he said. "For management and boards of global corporations, risk management must now become an essential part of preserving and protecting shareholder value and thus an area where they should focus a good deal of their attention. They also need to do a better job at monitoring these intangibles."

A recent Deloitte study found that executives are often curiously out of touch or poorly informed about other important indicators of success. According to the survey, 86% said their companies were excellent or good at tracking financial results, which normally represent lagging indicators of past performance. But only 34% felt likewise about their ability to monitor non-financial factors which can be leading indicators of sustainability.

Mr. Parrett said, "all of these factors, as well as others not included in the survey, form part of that broad spectrum of risk management issues essential to corporate viability and long-term sustainability."

DAVOS, Switzerland, Jan. 24 /PRNewswire/