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The Final Word - November 2003

By Michael Vincent

26 December, 2006

Global risk management is merely an extension of normal risk management that occurs within a micro or firm environment overlaid with complexity.  The process is extended across borders and jurisdictions to ensure multinational businesses and businesses operating internationally manage risk systematically and factor in the impact of global activities and outcomes.  Global risk can be defined as "activities and contact that occur across country borders and involve multi legal jurisdictions, cultural issues and exposures that increase the risk profile of an entity beyond that expected within a local jurisdiction."

 

Complexity and issues are increased and a more formalised and systematic approach to risk assessment and management is needed to make sure that risks are addressed and documented to ensure adherence to policy and procedure. 

 

The following is a list of potential risk exposures that are created or increased by incurring cross border or multi jurisdictional contact:

 

1. Commercial and market: what is the environment and what are the rules of the marketplace? Are they compatible with our own or is there a strong cultural difference, e.g. privilege? This can have a strong moral dilemma for any proposed operations.

 

2. Contractual: What is the legal environment and what are the repercussions for the operation of the business from all perspectives? Can we enforce findings or does the legal environment mitigate the potential gains from an offshore operation.

 

 

3. Economic and financial: How sophisticated is the economic environment and how mature are the money and financial markets? This is a critical issue in that the answer will demonstrate the degree of self-sufficiency the host operation will be able to attain.

 

4. Environmental: How developed is the awareness of environment and how stringent is the legal and compliance sphere within the host country? This again is a strong moral and ethical issue, if we are operating internationally whose duty of care applies, local or offshore? To use a lesser standard is to ask for trouble..5. Industrial relations: What principles do we apply, do we use our local environment and agreements or do we take advantage of local rules. This can have a major reputational impact on the global operation.

 

6. Interpretation of expectations: De we share the same view of outcomes as local partners and have we addressed cultural issues. Finally are we all quiet clear on all outcomes and expectations?

 

 

7. Joint ventures and partnerships: Doomed for failure unless there is significant gain for both sides and both sides understand the requirements of the agreement and strive to add value.

 

8. Legal and regulatory environment:

 

 

9. Natural events: Some parts of the world are worse than others especially in the mining industry.

 

10. Host country requirements: Legal and otherwise, ensure a full due-diligence proposal and business case is examined. Do not forget an exit strategy right up front.

 

Other issues that need to be factored into any equation for global operations are:

 

11. Political and social12. Counter-parties13. Technology14. Logistics15. Staffing Security

 

The above is not an exhaustive list but is discussed as a way of demonstrating that local issues transcend by complexity to the international arena.  It is an area that requires skills and a high degree of focus but need not be feared as something strange and different.  Common sense and good risk management systems will ensure a degree of safety from cross border or global exposures.

About the Authors

Director

Australasian Risk Management Unit

Faculty of Business and Economics

Monash University