Struggling with Transparancy

By Marinus de Pooter and Cees Visser.

Oganisations benefit from high-quality reporting about risk management. Stakeholders greatly appreciate receiving information about risks and about the way in which an organisation is managing these risks. Another benefit is that clear reporting forces the board to take stock and draw up a list of the risks and risk management systems.

This is an important first step on the road to improving the quality of the risk management process. Directors can create value by adopting a positive approach to new rules and codes that encourage them to produce high-quality risk reporting. Internationally harmonised standards for risk reporting can promote clear reporting too.

Managing expectations

Investors understand that companies can only make profits if they make a conscious decision to take certain risks – no risk, no reward. It is a known fact that risks and returns are inextricably interlinked, which is why investors expect to receive accurate information about both aspects. Note that the public sector is exposed to risks in a similar way when it comes to the realisation of the formulated goals.

Stakeholders do not mind accurately described risks that they can comprehend, even if these risks increase the volatility of the forecasted results. However, their pet hate is when risks suddenly appear from nowhere that the organisation failed to describe or only described in very broad terms. This is true especially if these risks lead to material financial setbacks that hit stakeholders like a bolt from the blue.

In other words, an organisation’s use of external reporting to explicitly discuss the risks it is facing is a very effective way of satisfying stakeholders’ need for information about risk profiles and risk management.

At the same time, this reporting means that the organisation can manage the expectations of regulators and other stakeholders about the results and their volatility. This in turn means that they feel that any fluctuation in the desired outcome of the objectives is less unexpected.

Read more in Public Risk: About Values in our Society.