A study in enterprise risk management
A new article in Singapore’s Business Times explains that when Singapore achieved its independence in 1965 (through separation from Malaysia), its attention to enterprise risk management helped it become the economic success it is today. The author says:
Mr Lee [Singapore’s Prime Minister] could arguably have contributed to the development of the ERM framework. Part I of From Third World to First: The Singapore Story, 1965-2000 reads in many areas like a primer on ERM concepts and techniques.
The article refers to the 1995 Australia/New Zealand risk management guidance, which was followed by the COSO (seen as an American publication) and ISO publications.
I like the article’s definition:
ERM can be broadly defined as managing uncertainty – both the risk and opportunity arising therefrom – to create, sustain and grow value.
In 1965, Singapore was faced by a number of grim realities. It had no natural resources; in fact, it has to import almost all its water and food. (The article talks about the lack of an ‘economic hinterland’.)At that time, Singapore had uncertain relations from its neighbors in Malaysia and Indonesia, which could have led to conflict. In its early days of independence from Great Britain (achieved in 1959), the region went through a period of communist insurgency, so civil peace could not be taken for granted. Finally, the region had a culture that included a level of corruption and bribery (coyly referred to in the article as ‘guanxi’).
Singapore’s ERM program identified three risks, according to the article:
Risk A was survival without an economic hinterland. Risk B centred on guanxi or personal relationships in business transactions. Risk C was the prevalent toleration of money politics accepted as common practice and part of the regional political culture.
Risk A arose from the uncertainty of the new nation’s survival without an economic hinterland following Singapore’s expulsion from Malaysia.
Risk B and Risk C, attributable to history and culture, threatened achievement of the strategic goals and operational objectives arising from Risk A.
The leadership team saw both Risk A and Risk B as road blocks. These risks precluded good corporate governance essential to attract foreign direct investments to support Singapore Inc’s early industrialisation goals.
Singapore’s leadership team addressed these three risks, not by always trying to limit risk but in some cases working to take advantage of opportunities.
To mitigate Risk A, the leadership team identified the opportunities presented by the uncertainty of survival without an economic hinterland.
These opportunities were channelled to business planning. A plan and strategy re-emerged, Mr Lee wrote, to “leapfrog the region”, link up with developed nations, and “create a First-World oasis in a Third-World region”.
The key operational objective was to build Singapore Inc’s own economic hinterland, bring about transformational change and prove the prognosticators wrong.
Responding to Risk B and Risk C to achieve comparative advantage in a region known for corruption, the leadership team embraced the rule of law.
Built on the legacy British legal system, the law was implemented under a culture of efficient, effective and honest enforcement.
This served to encourage the inflow of investments and to protect investors. The action comported with the ERM concept and technique to use controls, together with monitoring, as a risk response or risk treatment.
Control was in the form of laws, regulations and rules to mitigate the identified cultural risks. Monitoring came from the enforcement of rules efficiently, effectively and honestly.
This is a time when tributes to Lee Kuan Yew (the Mr. Lee referred to by the article) are flowing in. Who can dispute the success of his leadership (while recognizing the harshness of some earlier actions)?
Is it justifiable to put much of the transformation of Singapore down to risk management? The article says:
The legacy of Mr Lee and his pioneer generation of leaders in facing uncertainty with capacity, sagacity and gumption is an inspiration to managers in this endeavor.
What do you think?
Is risk management about “facing uncertainty with capacity, sagacity and gumption”?