Business leaders are not doing enough to protect their companies from the risks posed by major global events, the Institute of Directors (IoD) has warned.
In a report published today, the IoD said the increasingly inter-connected world means that government debt crises, extreme weather events and social instability can have knock-on effects for British firms.
Roger Barker, director of corporate governance at the IoD, said companies all too often focus on risks that affect their normal activities, and pay too little attention to global dangers which can have equally damaging consequences for the unprepared.
He said: “Whether it was a large chunk of the international banking system collapsing, or the after-effects of the Japanese tsunami on the world’s energy markets, the last few years have shown that the commercial impact of global threats is very real.
“Boards cannot afford to ignore trends or events that seem to be happening a long way away.”
He said that top business leaders must take responsibility for identifying and managing dangers in a way that is not just a “tick-box compliance exercise”.
“Directors should build in resilience to every aspect of the organisation,” he said. “Success in business is all about taking risks, but directors must be clear how strong their stomachs are, and what they plan to do if things go wrong.”
The guide, written by industry experts from the IoD, Airmic, Marsh, PwC and Zurich, builds on the World Economic Forum’s global risk 2014 report.
It aims to give company directors tools to manage risk, not only to avoid disasters, but also to identify opportunities to gain a competitive advantage.
It recommends appointing a chief risk officer or forming a dedicated risk committee that can consider the potential impact of rare or unlikely “black swan” events, such as the collapse of global financial institutions or even governments.
James Sproule, chief economist at the IoD and author of a chapter in the report on the financial risks companies face in the post-crash world, said the recent banking crisis had shown that complex financial derivatives were not the way to eliminate risk.
He said: “The global financial crisis proved once and for all that no clever risk management tools could ever replace judgment and experience, and that there is no such thing as a ‘risk-free’ asset.”
The report comes as a business finance firm warns of a “hidden credit crunch” for small and medium sized enterprises (SMEs).
LDF says banks are cutting small business overdrafts much more sharply than they are traditional bank loans, which are more often scrutinised.
The company claims that in the two years to the end of March, the value of overdrafts drawn by small businesses fell by 23 per cent, to £14.1 billion. Despite measures encouraged to stimulate lending, traditional bank loans to SMEs have also declined, down 9 per cent over the same period to £170bn.
LDF says cutting overdraft facilities is an easy target for banks looking to reduce their loan books, as overdrafts can be withdrawn almost immediately.
Peter Alderson, managing director of LDF, said: “A lot of attention is paid to the amount of term lending banks provide to SMEs, but the withdrawal of overdrafts is the hidden credit crunch for small businesses.”