An excessive focus on short-term risk management can be hazardous to corporate health, suggests a new report from Deloitte & Touche LLP.
The analysis, of U.K.-based businesses, may also serve up lessons for publicly traded companies in the United States and the rest of the world.
Between 1995 and 2005, the companies in the FTSE 100 and FTSE 250 indexes that experienced the largest one-day drops in share price were the companies that focused on short-term risk management, according to an account of the report by London’s Daily Telegraph. Of that group, noted Deloitte, 80 percent have not yet fully recovered from that drop.
These “value destroyers,” to use Deloitte’s term, focus on short-term tactics that may shield themselves from outside risks but do not build long-term stakeholder value. “They lack the capability to build and manage the resilience-creating intangible assets, such as unique business practices, strong brand and robust information flows,” asserted the report.
The “value creators” in Deloitte’s study focused on long-term risk management strategies such as brand, reputation, and unique organization practices and strategies. These companies not only recovered any lost value, Deloitte found, but added further value.
U.K. markets have been more volatile than global markets during the last 10 years, Deloitte noted. Even so, U.S. companies were not exactly immune from the 1990s Asian financial crisis, the Internet bubble and bust, global recession, terrorist attacks, and the Iraq war.