Analysis of the Risk Appetite of the Organization
Discuss about the Enterprise Risk Management and Requirements of ISO.
Following the recent media report, Blue Sky is battling the challenge of credibility within the organization’s system of governance. This issue results from undrawn debt facilities inclusion in its FEAUM (fee-earning assets under management). The information provided in the market update indicates that this situation caused Blue Sky to withdraw its guidance of profit for the two subsequent financial years. This crisis became critical after the fund manager disclosed that the credits, which were not used, were amounted to up to 20 percent of his assets under management right to redemption that was disputed amounting to $ 4 billion (Shapiro & Poljak, 2018). The aim of this disclosure was to make things clear concerning the actual nature of FEAUM of Blue Sky, since the firm has been striving to restore its credibility. The information further reveals organization has access to undrawn debt facilities amounting to $763.5 million for its investment in real estate. In spite of this scenario, the undrawn debt is still component of fee-earning assets of the company (Jacobs, 2018). This paper seeks to categorize the risks using the Enterprise Risk Management (ERM) framework.
As noted from the media, it is evident that the activities of the organization can expose it to a myriad of risks. Such risks are categorized as financial, strategic, IT or information and technology, environment, and reputation risks. In the context of the firm’s risk culture, its overall risk management program has placed focus on the financial markets unpredictability. This program also aims at reducing the potential severe impacts on the firm’s financial performance (Blue Sky Alternative Investments Limited, 2017. Through the framework of ERM, the company has been to offer value for its stakeholders. This is based on the fact that the current situation has had an impact on the organization and stakeholders based on the FEAUM and underlying earning portrayed in Figures 1 and 2. According to this framework, the maximization of value is attained when management comes up with objectives and the strategy to achieve an optimal balance between the goals of return and growth and the associated risks. This can also be done by efficient and effective deployment of resources to fulfill the objectives of the firm (Blue Sky Alternative Investments Limited, 2017).
The company is aware of the fact that investments in securities are exposed to market risks among others and that there is no guarantee or assurance that the expected objectives of investment will be met as reported in the Morningstar (2018). Additionally, the organization understands that there may or may not be sustainability of its performance of a security in the past in the offing and that the future performance cannot be known. It is also evident that the firm has shown readiness for the fluctuation of a security investment return as well the principal value of an investor in such a way that when redeemed, shares of an investor may be worth less or more as compared to their initial cost. It is noteworthy that the current investment performance of a security may be greater or lower as opposed to the performance of the investment indicated within the report of the organization (Morningstar, 2018). The report also provides the informational which the intended financial professionals and/or sophisticated investors can use. This should not be only information to be utilized by these Users or their customers in the decision-making on investment.
ISO Requirements for Risk Management
One of the key aspects of ERM framework is that there has to be an alignment of the risk appetite and strategy. In this case, the management takes into account the risk appetite of the company in the evaluation of the strategic alternatives, development of the mechanisms for the management of the related risks, and setting of the associated objectives. Therefore, it is important to analyze each risk category in the context of the organization’s risk appetite.
The company seems to be struggling with the financials which comprise credit risk, liquidity risk, and market risk. The managers have indicated that they are carrying out financial detective job with the limited public information in pursuit of dealing with the related risks. They acknowledge that they could not realize that undrawn debt was included in the financial report. The financial experts revealed that the cash flow statements of Blue Sky had historically indicated that the firm hard barely made profit on what the disclosure termed as the fees of management. This situation implies that the company never experienced profitability based on the cost of running the business subtracted from the annuity management fees (Shapiro & Poljak, 2018). Additionally, the idea of raising the equity resulted in a risk of whether firm would raise new funds for its operations. Following this situation, Blue Sky has considered cutting down its cost base to be lower than that of its annual recurring management charges amounting to nearly $30 million. The CEO also reveals that there was an issue of tax imposition on the project development costs. At this point, there was a need for one to choose the denominator that he or she intends to utilize to be measured, equity, debt, and realizable value gross.
Because of these risks, Blue Sky has also considered performing a vigilant liquidity risk management to hedge the related risks. This approach has required the company to retain its sufficient liquid assets, which include cash as well as the cash equivalents and available facilities of borrowing. This consideration makes the firm to have the ability to pay debts they are due and payable. The company demonstrates it risk appetite through the management of liquidity risk by continuous matching of the maturity profiles of financial liabilities and assets together with monitoring of the actual as well as the forecast cash flows. Therefore, the management of the firm finds ERM framework helpful in attaining the targets of performance and profitability of the organization and to prevent loss of the resources.
In terms of the market risks, the time of the release of the media report appears to be the first time whereby Blue Sky has attempted to explain to the market the manner in which it has reconciled its assets. The firm had been accused for over-estimation of the metric, where Blue Sky showed no willingness to break the constituents of its stronghold, thought to have been bound by commercial trust. The issues surrounding the company compelled the top management to suggest the need for the market regulator to examine activities of short selling that place the firm in a risky condition (Shapiro & Poljak, 2018).
The determination of the ERM to be effective in each of the organizational objectives of Blue Sky is necessary when managing the related risks. This approach requires that the board of directors as well as the management should have a significant assurance that they have an understanding of how the strategic and operations objectives of the firm are being attained (Flaherty & Maki, 2004). In a similar vein, the management of this entity has focused on ensuring that its reporting is not only reliable but also there is compliance with the applicable regulations and rules. The four categories of the organizational objectives that ERM can be directed to achieve within Blue Sky include the operations, strategic, compliance, and reporting objectives (Flaherty & Maki, 2004). Indeed, the problem surrounding the firm emanates from the risks associated with the efforts towards achieving these four groups of objectives.
Based on the media report concerning the current situation of Blue Sky, objectives associated with reliability of compliance and reporting with rules and regulations seem to be within the control of the organization. In this case, it is expected that the ERM will offer reasonable assurance of meeting the organizational goals in response to the strategic risks. However, it should be noted that achieving strategic and operations objectives can be affected by the external events, which are not always within the control of an organization. One of such external events, as indicated in the media report, is that the market has made a bad judgment concerning the health of the company’s business, in relation to the disclosure levels which they can offer at the moment (Shapiro & Poljak, 2018). It is possible that the ERM can offer a reasonable assurance or guarantee that management, as well as the board in its role of oversight, are aware of the extent to which the company is going toward achieving the objectives in a timely way. Following this account, ERM framework is not confined to being a mere serial process, where only one element severely impacts the next as noted by AIRMIC, Alarm, and IRM (2010). It takes the form of a multidirectional and iterative process where nearly any element does and can affect another component within an organization when seeking to address the strategic risks.
The company can hedge the risks related to its financial and accounting activities by adopting innovation in its operations in the context of information and technology. With modern innovations, financial reporting and disclosure can be made easier and there can be a high level of accuracy in such aspects. The firm has shown its ability to invest in IT systems as alternative to hedging the related risks. In this case, there has been a need for data aggregation or integration to ensure automation as well as the flexibility of the process like reporting, and particularly where the options have had distinct and separate set of the forums of technology (Drisko & Truong, 2015). Nonetheless, there are risks associated with the implementation of IT systems. It expected that this strategy may result in additional operational costs of the business since the IT equipment and personnel are expensive. Conducting training to the employees concerning the new technological advances may also add to such costs. Notwithstanding these risks, implementation of IT systems in the organizations financial reporting has long-lasting benefits (Drisko & Truong, 2015).
Blue Sky also seems to be operating in a highly competitive business environment. Consequently, it faces an ever increasing competition from its rivals in the marketplace. There is remarkable evidence that the competitors of the companies in Australia and overseas are many, large multinational organizations among others. It cannot be assured that the rivals of Blue Sky will not do well in the development of more effective products and take market share from those that have been, or are under development, by the firm. The competitors of the organization at all times make some decisions on pricing, marketing, or service or acquisitions which could severely influence the business of the firm, financial conditions, and results of operations. All these efforts constitute their strategic response to the changes in the competitive business environment in which they have to survive. Therefore, the firm has become aware of the risks associated with such competition and shifted focus on making strategies that would make the company have more competitive advantage in the market. For instance, it has started concentrating on the long-term investments in the private market to increase its profitability and performance.
ERM has been useful ensuring that there is effective compliance and reporting with rules and regulations which, in turn assist in avoiding damage to the reputation of the company and the related consequences. Thus, this framework is important to an organization since it helps it get to a place where it wishes to and shun scandals and surprises in the course of its business. Because of this condition, the firm intends to ensure a strong track record in the delivery of improved services and goods and compliance with the rule and regulations under which the firms should operate (Blue Sky Alternative Investments Limited, 2018).
As noted from the analysis of the risks of the company, there are is a need for changes to be made internally by the Blue Sky to avoid or deal with such a risk event in the offing in relation to corporate governance. The company has to disclose whether it possesses any material exposure to environmental, social, and economic sustainability risks, and, in case it does, the manner in which it manages or plans to address such risks is important (ASX Corporate Governance Council, 2014, p. 30). The recommended changes are as highlighted below:
- The firm should consider focusing on protecting its integrity in corporate to avoid the reputation risks in the offing. It is required that the company needs to have a rigorous and formal process which can facilitate independent verification and as well protect its corporate reporting integrity (ASX Corporate Governance Council, 2014, p. 4).
- The company also needs to have an understanding that increasing the global concerns for the community of business to handle the issues of social, economic, and environmental sustainability, as well as raising the need from investors, and particularly institutional investors. This approach can be considered for achieving greater transparency on such matters for company to properly assess investment risks (ASX Corporate Governance Council, 2014, p. 4).
- Laying a solid foundation for oversight and management will be important and will the firm to establish and well disclose the respective responsibilities and roles of its board and management. This should also be demonstrated in the manner in which their performance is evaluated and monitored.
- Recognition and management risk also needs to form part of the firm’s ERM framework. In this case, the company has to establish a risk management framework that is sound and as well review the effectiveness of such framework periodically.
References
AIRMIC, Alarm, & IRM, (2010). A structure approach enterprise risk management (ERM) and the requirements of ISO 31000 [Online]. Available at https://www.theirm.org/media/886062/ISO3100_doc.pdf [accessed on 27 May 2018]
ASX Corporate Governance Council, (2014). Corporate governance principles and recommendations (3rd Edition). [Online]. Available at https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-3rd-edn.pdf [accessed on 27 May 27, 2018]
Blue Sky Alternative Investments Limited, (2017). Appendix 4D Half-year report for the half-year ended 31 December 2017 [Online]. Available at https://member.afraccess.com/media?id=CMN://2A1065373&filename=20180219/BAF_01951861.pdf [accessed on 27 May 27, 2018]
Blue Sky Alternative Investments Limited, (2018). Equity raising: Placement and share purchase plan [Online]. Available from https://member.afraccess.com/media?id=CMN://2A1069076&filename=20180305/BLA_01958456.pdf [accessed on 27 May 27, 2018]
Blue Sky Alternative Thinking, (n.d). Blue Sky Alternative Investments: 1H FY18 Results Presentation [Online]. Available at https://www.aspecthuntley.com.au/asxdata/20180219/pdf/01951847.pdf [accessed on 27 May 2018]
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