Operational risk matters for company directors, CEOs

Companies should be wary of danger lurking in the most of the unlikely places in their operations. PHOTO | FOTOSEARCH So, what do the August 2017 presidential elections, the near-collapse of Kenya Airways (KQ), the circus of the hoods at Kenya Revenue Authority in July 2019, the infamous IFMIS scandals the structural collapse of private and public schools, among other mega scandals have in common?

They exemplify operational risk events that have affected just about every sector of Kenya’s economic life.

These are not tail events, but frequent and impactful occurrences whose consequences linger on for generations. The list of operational risk events is endless. Most of the events if not all are tragic, and represent some element of moral failure, a flaw in character, nevertheless, they are serious operational risk failures.

Many people have a difficult time understanding operational risk, while an even the majority of stakeholders have never heard of the term — even though a great number of risk managers and finance specialists continually affirm that extraordinarily poor management of operational risk (not other categories of risk, such as market, liquidity or credit) is exactly what led to the collapse of global financial markets in 2007-2008. In Kenya, at the centre of most losses, collapsed organisations and institutions, collapsed buildings and even electoral malpractices occur due to failure of operational risk management.

There is the misplaced perception that credit risk the possibility of a loss resulting from a borrower’s failure to repay a loan or meet their contractual obligations is the most important of the core risks. It simply is not and pales in comparison with operational risk.

Market risk, which is caused by changes in commodities, asset prices, changes in interest rate, and foreign exchange, remain largely insignificant in the risk taxonomy and economic life.

The beast lies in operational risk, and its impact is larger than the combined force of credit and market risks.

What matters most, boards, C-suite ought to be closely watching over are failures in operational risk management. But, more damaging and still unclear to many is the present convergence of operational and cyber risks that should trigger a renewed sense of urgency in managing operational risk.

And should anyone think that the call for a renewed effort to identify and manage the risk is a red herring consider this: In 2017, Kenya lost about Sh18 billion to cybercriminals. In 2018, cybercrime losses jumped to Sh30 billion!

Conservative estimates have […]

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