1. Professor Philip Linsley The University of York

4. Three sessions
Monday
Should companies report on risk in their annual report?
Tuesday
Short history of risk and risk management
Wednesday
Why is it difficult to create a risk management system that works?

5. Should companies report on risk in their annual reports?

6. An introduction to the issue of risk disclosure
The development of the idea of risk disclosure
Problems in risk disclosure

7. Risk & Business Every business involves risk BUT
INVESTORS & STAKEHOLDERS HAVE LIMITED KNOWLEDGE OF THE RISKS

8. OVERALL NEED FOR COHERENT VIEW OF RISK
SUGGESTED IN LATE 1990s
OVERALL NEED FOR COHERENT VIEW OF RISK
Companies should report on overall risk position
1. List the major risks
2. Describe actions taken to manage those risks
3. Identify the size of the risks

9. FOOD AND CLOTHING COMPANY REVENUE £10bn
Lists 12 major risks in 2017 annual report

10. RISK
DESCRIPTION OF RISK
MANAGEMENT OF RISK
Market competition
Future performance will be impacted if we fail to meet customer expectations
Strategy in place to improve profitability
Focus on product quality and style
Engaging with customers ….

11. DIRECTORS IGNORED THE SUGGESTION
IT WAS THEN SUGGESTED IN EARLY 2000s
1. Disclose forward-looking (future) risk information
2. But exclude commercially sensitive risk information
3. And disclose voluntarily (no regulation)

12. Why future risk information?
Better than past risk information
But predicting the future is difficult
And predicting the future could be problematic
Inherent uncertainty and shareholder reliance on the information

13. Why allow commercially sensitive information to be excluded?
To encourage directors
But this is problematic

14. Why make risk disclosure voluntary?
Directors have incentives
Demonstrate accountability
Demonstrate equal treatment of all shareholders
Signal strategic capabilities
Lower cost of capital

15. Risk disclosure requirements have now arisen in many different countries

16. But note that banks have very different requirementsUK
Law now requires description of principal risks and uncertainties in annual report
But note that banks have very different requirements

17. Item 1A of annual 10-K filing requires disclosure of risk factors
USA
Item 1A of annual 10-K filing requires disclosure of risk factors

18. ITEM 1A.  RISK FACTORS
If we do not anticipate and address evolving consumer preferences, our business could suffer.
Increased competition and capabilities in the marketplace could hurt our business.

19. ITEM 1A.  RISK FACTORS
Water scarcity and poor quality could negatively impact the Coca-Cola system's costs and capacity.
Public debate and concern about perceived negative health consequences of certain ingredients, such as non-nutritive sweeteners and biotechnology-derived substances, may reduce demand for our beverage products.

20. ITEM 1A.  RISK FACTORS
Raw materials supplies
The citrus industry is subject to disease and the variability of weather conditions, which affect the supply of orange juice, an important raw material for our business.
In particular, freezing weather or hurricanes in central Florida may result in shortages and higher prices for orange juice.
In addition, disease is reducing the number of trees and increasing costs.
Adverse weather conditions may affect the supply of other agricultural products we use. For example, drought conditions in certain parts of the United States may negatively affect the supply of corn.

21. Academic studies
Beretta, S. and Bozzolan, S. (2004). A framework for the analysis of firm risk communication. The International Journal of Accounting, 39, Maffei, M., Aria, M., Fiondella, C., Spanò, R., Zagaria, C. (2014). (Un)useful risk disclosure: explanations from the Italian banks. Managerial Auditing Journal, 29(7), 621 – 648.

22. Does this mean risk disclosures are not useful?
Perhaps they serve the purpose of reassurance?