Understanding Key Business Risks in a Challenging

Nigerian Business Environment

Franklin N. Ngwu (PhD, PIOR) Strategy, Finance and Risk Management

Email: fngwu@lbs.edu.ng

• What do investors want?

Matthew Hammond @ TBLI Conference Europe 2011- London - United Kingdom

Corporate governance is at the heart of investment decisions

Dharnesh Gordhon

What is a Risk

• A risk can be defined as anything that constrains an organization from achieving its objectives and aims!

• Types of Risk- Geopolitical, Societal, Economic, Environmental and Technological, Credit, Market, Legal, PEOPLE, Reputational, Foreign Exchange, Operational, Sovereign, Compliance

• Operational Risk is argued to be the fulcrum upon which the key causes and management of most other risks depends in a firm!

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Purpose of Risk Management

• Reduce cost of losses

• Reduce surprises

• Reduce capital allocation

• Ensure Business Continuity and Sustainability

• Key Issues in Risk Management-Risk Appetite,

Risk/Corporate Culture (The Board/Senior Mgt.)

• Organisational structure and Technological

infrastructure

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Risk Classification

• Macro Risks : Global, Regional, National

• External Risks: Outside the Firm

• Micro/Internal : Within the Firm

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Global Risks Landscape 2016

Top 10 risks in terms of

Likelihood Top 10 risks in terms of

Impact Categories

Large-scale involuntary migration Failure of climate-change mitigation and adaptation

Economic

Extreme weather events Weapons of mass destruction Environmental

Failure of climate-change mitigation and adaptation

Water crises Geopolitical

Interstate conflict Large-scale involuntary migration Societal

Natural catastrophes Energy price shock Technological

Failure of national governance Biodiversity loss and ecosystem collapse

Unemployment /underemployment Fiscal crises

Data fraud or theft Spread of infectious disease

Water crises Asset bubble

Illicit trade Profound social instability

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Categories of Internal Risk

• Internal Fraud

• External Fraud

• Employment Practices and Workplace Safety

• Clients, Products and Business Practices

• Damage to Physical Assets

• Business Disruption and System Failure

• Execution, Delivery and Process Management

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Risk in business: the next 20years 10

Negative GDP growth

(-1.7%)

2 016 wa s a v e ry t o u g h y e a r ( s o u r c e : F D C 2 0 1 7 )

Currency depreciation

(IFEM: 305.9 Parallel: 490)

High inflation (18.55%)

Oil production

shortfall ( 1.59mbpd)

Fuel scarcity &

subsidy removal

Release of Chibok

girls

Industry ratio of NPL up

30.65% (H1 ‘16) from 5.9%

(H2 ‘15)

40% wiped off All Share

Index (one of the worst

performing stock markets

in 2016)

L e a d i n g e c o n o m i c i n d i c a t o r s ( s o u r c e : F D C 2 0 1 7 )

LEI 2011-2015 avg 2016 2017

GDP growth (%) 4.72 -1.7 0.9

Labour Productivity growth (%)

0.58 -4.1 -1.9

Power (MW) (2014 – 2016)

3421 2920 4500

Oil Price ($pb; avg) 83.4 44.8 56.5

Oil Production (mbpd) 1.86 1.59 2

Trade Balance ($bn) 26.8 -6.1 -0.7

Net FDI ($bn) 3.2 1.6 1.7

External Reserves ($bn) 29.07 (end of 2015) 25.84 29

Exchange rate (N/$; year-end)

IFEM: 190.44 Parallel: 226.78

IFEM: 305.9 Parallel: 490

IFEM: 420-450 Parallel: 480-500

External Debt ($bn) 25.24 33.2 37.2

Inflation (%; year-end) 10.69 18.55 12.5

Avg. corporate profitability growth (%)

19.74 -17.4 ? Source: CBN,NBS, EIU, FDC Think Tank

Economic Activity: GDP YOY%

• Description: Gross domestic product (GDP) measures the final market value of all goods and services produced within a country. The GDP by expenditure approach measures total final expenditures (at purchasers' prices), including exports less imports. This concept is adjusted for inflation. The frequency is quarterly. Peer Average: 2.23

Economic Activity: GDP Per Capita

Peer Average: 21,532.45

Economic Activity: CPI

Peer Average: 4.27

Economic Activity: Unemployment

Description: The unemployment rate measures the percent of people without employment but actively seeking. Quoted monthly. Peer average: 7.72

Sovereign and Fiscal Risk: Debt

Description: Total Gross External Debt is made up of debt from 5 main categories, being General Government, Monetary Authorities, Banks, Inter-company lending and Others. Both long term and short term debt is captured, which includes Money Market Instruments, Loans, Trade Credits, Currency and Deposits and other Debt Liabilities. Peer Average 60.94

Currency Reserves (% GDP)

Description: Exchange Rates in IFS are classified into three broad categories, reflecting the role of the authorities in determining the rates and/or the multiplicity of the exchange rates in a country. The three categories are the market rate, describing an exchange rate determined largely by market forces, the official rate, describing an exchange rate determined by the authorities - sometimes in a flexible manner, and the principal, secondary, or tertiary rate, for countries maintaining multiple exchange arrangements. Peer Average: 62

Credit and Int. Rate Risk: 3 Mth Deposit Rate

Description: The annualized rate of interest that a bank will charge for lending or pay for borrowing a currency for a specific tenor. Peer Average: 4.09

EIU Banking Risk

Description: Banking sector risk gauges the risk of a systemic crisis whereby bank(s) holding 10% or more of total bank assets become insolvent and unable to discharge their obligations to depositors and/or creditors. The ratings are measured on a scale of 0-100. Higher scores indicate a higher level of risk. The scale is divided into ten overlapping bands: AAA, AA, A, BBB, BB, B, CCC, CC, C, D. For a more detailed explanation of our ratings system, please go to {eiu.com/crs}. Peer Average: 42

Political Risk Exposure: EIU Political Risk

Description: Political risk evaluates a range of political factors relating to political stability and effectiveness that could affect a country's ability and/or commitment to service its debt obligations and/or cause turbulence in the foreign-exchange market. This rating informs sovereign, currency and banking sector risks. The ratings are measured on a scale of 0-100. Higher scores indicate a higher level of risk. The scale is divided into ten overlapping bands: AAA, AA, A, BBB, BB, B, CCC, CC, C, D. For a more detailed explanation of our ratings system, please go to {eiu.com/crs}. Peer Average: 40

Govt. Risk: Control of Corruption

Description: Reflects perceptions of the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as 'capture' of the state by elites and private interests. Ranges from approximately -2.5 (weak) to 2.5 (strong). Peer Average: 0.38

Govt. Risk: Government Effectiveness

Description: Reflects perceptions of the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government's commitment to such policies. Ranges from approximately -2.5 (weak) to 2.5 (strong). Peer Average: 0.59

Gov. Risk: Regulatory Quality

Description: Reflects perceptions of the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development. Ranges from approximately -2.5 (weak) to 2.5 (strong). Peer Average 0.58

Govt. Risk: Rule of Law

Description: Reflects perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence. Ranges from approximately -2.5 (weak) to 2.5 (strong). Peer Average: 0.47

Business Env.: Ease of Doing Business

Description: The ease of doing business sector ranks economies from 1 to 183. For each economy the index is calculated as the ranking on the simple average of its percentile rankings on each of the 10 topics covered in the Doing Business Report. This sector covers the period June through May of the respective years. Peer Average: 57

Business Env.: Starting a Business

Description: The starting a business sector ranks economies from 1 to 183. For each economy the index is calculated as the ranking on the simple average of its percentile rankings according to procedures, time, cost and paid-in minimum capital. Peer Average: 75

Reasons for the Limited Outcomes

• Weak legal and accounting systems

• Lack of skilled regulators/ workers

• Complex bureaucracy

• Weak and unskilled enforcement institutions

• Relevant Reasons but not Sufficient!

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Characteristics of a Plural Society

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Characteristics of a Plural Society

• A society is pluralistic to the extent that it is structurally segmented and culturally diverse. In more operational terms, pluralism is characterised by the relative absence of value consensus; the relative rigidity and clarity of group definition; the relative presence of conflict, or, at least, of lack of integration and complementarity between various parts of the social system; the segmentary and specific character of relationship, and the relative existence of sheer institutional duplication( as opposed to functional differentiation or specialisation) between the various segments of the society (Van Den Berghe, 1964: 2) 30

Forms of Social Capital

• Integration= Intra-community ties

• Linkage = Extra-community networks

• Synergy =State-society relations

• Organisational integrity’= Institutional coherence, competence and capacity

• And

• The legal system- which one (formal or informal) ?

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Levels of Social Analysis

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_____________________

Frank H Stephen

____________

ESNIE 2003

Social

Embeddedness

InstitutionalInstitutional

EnvironmentEnvironment

GovernanceGovernance

Resource Allocation continuous

1 - 10 years1 - 10 years

10 - 100 years10 - 100 years

100 - 1,000 years

Adapted from Williamson (2000)

Legal System: The Fulcrum of Sustainable Growth

• English legal development appears as a historical continuum. There is no obvious rupture, no wholesale wiping out of legal wisdom of centuries and no division of the law into a pre-and post-revolutionary era. In English law the present is never completely shut off from the past and its historical roots are easily perceived (Caenegem, 1986:

8).

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Past, Present & Future

• Out of hard and bitter experience, Englishmen had come to learn that the remorseless, incalculable power of the past over the present was not to be dispelled by the strivings of a single generation. From 1660 onwards, England was never again entirely to forget that the secret of a nation’s strength is to have the power of the historic past behind it, not against it (Caenegem 1986: 158)

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The Firm (Divergent Interests/Risk Management)

• Shareholders- Higher Dividend

• Employees- Higher Wages and Benefits

• Government- More Tax and Compliance with Regulations

• Communities- More Corporate Social Responsibility

• Consumers- Low Prices, excellent quality products and services!

• All Stakeholders- Sustainable Business!

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Implications for Business

• Strategy and Risk Management

• Corporate Governance

• Human Capital Management (Recruitment and Retention)

• Context and Culture Matters!

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The Purpose of the Enterprise • Our guiding aspirations

The right playing Field where we will Compete • geographies, product categories, consumer segments,

channels, vertical stages of production (stage along the

value chain)

The unique Right to Win • Our value proposition

• Our competitive advantage

The set of Capabilities required to Win • Our reinforcing activities

• Our specific configuration

The Supporting Systems • Support systems, structures, and measured required to

support our choices

What is our Winning Aspiration?

Where will we Play?

How will we Win?

What Capabilities must be in Place?

What Management Systems are required?

The Strategy Process - An Integrated Cascade of Choices

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Strategy Outcome: Typical Nigerian Firm

The Problem…. 39

Actively Disengaged

Not Engaged Engaged

Nigeria 23% 65% 12%

Botswana 38% 52% 10%

South Africa 45% 46% 9%

Emerging market

countries

Developed market

countries

What will

be different

if they

were?

8/9 in 10

of people

you work

with are

Engaged

The Gallup Report 40

30% of employees are likely to be searching for new positions while at work 39% employers are concerned they are likely to loose top talent. 32% of employers reported that top performers left their organization 75% of employees who voluntarily leave their jobs are quitting their bosses

How can we Engage

with the WHOLE

EMPLOYEE?

Your Organizations Challenge 41

The Challenge of

Translating Strategic

Intent into Outcomes

What is the biggest

challenge that

Business Leaders

face?

Risk Management

Organizational Culture & Risk Management

• What does it mean ? Change Accelerator (competitive advantage) or Impediment

• The Components-(Micro and Macro)

• Who determines it ? (Board, Senior Management, Middle Managers, Junior staff)

• How do you Sustain, Expand and Benefit from it

• Role of the Board and Senior Management in creating and sustaining Organizational Culture

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Organizational Culture/ Risk Management

• Some of the main issues that impact on risk culture are:

Quality and integrity of staff;

Extent of change the organisation is going through;

Effectiveness of the control environment;

Reward practices

The Business Environment

• Favourable risk culture depends on ability of organisation

to develop positive attributes in a range of areas

• Especially the employees! (and other stakeholders) due to

divergent and conflicting interests

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The Risk Chain

Cause(s) Event Effect(s)

Resources

Reputation

People

Processes

Systems

External

Events

Human

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People Make it Happen 45

Skills & Behaviours Formal Structure of Work Relationships

Management Processes

Culture

Climate

Strategic Goals

Outcomes

CLIMATE

It is People, their thoughts, ideas and activities, that translate intent and goals into output.

Service

Innovation

Cost

Risk

What Kind of People & Team Work 46

Adverse Selection

Moral Hazzard

Why think or work

with others?

‘Two Heads are Better

than One’

Always?

It depends!!

HR as an Effective Risk Manager

• Risks of Asymmetric Information

• Recruitment Risk = Adverse Selection

• Productivity/Performance Risk= Moral Hazard

• Recession = Current/Emerging Risks

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Six inter-related stages of the risk

management process

Stage 1: Risk Strategy

Stage 2: Risk Identification

Stage 3: Risk Assessment &

Measurement

Stage 4: Risk Mitigation & Control

Stage 5: Risk Monitoring

Stage 6: Risk Reporting

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RISK MITIGATION PROCESS

TRANSFER Medium Risk

LF/HI

AVOID High Risk

HF/HI

CONTROL Medium Risk

HF/LI

ACCEPT Low/Medium Risk

LF/LI

Frequency/Likelihood (%)

Severity/Magnitude(£)

Four Types of Firms During a Recession

(1980-82, 1990-91, 2000-2

• Prevention- Focused Companies (Sony) (21%)

• Promotion –Focused Companies (HP)(26%)

• Pragmatic Companies (Staples) (29%)

• Progressive Companies (Target) (37%)

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STRATEGIES IN RECESSION

PREVENTION FOCUSED MOVES

PROMOTION FOCUSED MOVES

MARKET DEVELOPMENT

ASSET INVESTMENT

BOTH

EMPLOYEE REDUCTION

GOOD BAD WORST

OPERATIONAL EFFICIENCY

GOOD GOOD BEST

BOTH BAD BAD GOOD

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Culture, Strategy & People

• 1: Match Strategy and Culture

• 2: Focus on a Few Critical Shifts in Behaviour

• 3: Honour the Strengths of your Existing Culture

• 4: Integrate Formal and Informal Interventions

• 5: Measure and Monitor Cultural Evaluation

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Behind every Market

• Deeply Understand the Context

• Culture Matters!!!! (Key to Sustainable Growth)

•Thank You • 08147662821

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