ENTERPRISE RISK MANAGEMENT IN PHARMACEUTICAL COMPANY
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ENTERPRISE RISK MANAGEMENT IN PHARMACEUTICAL COMPANY
Chapter one
INTRODUCTION
1.1 Background of the Study
In the corporate world, every individual and company is at risk. Any firm that exists and survives must face some level of risk. Risks arise simply because persons, businesses, and organisations have ‘assets’ of a material or immaterial form that may be exposed to physical injury that has ramifications for the known entity (Andy Osborne 2012- Risk Management made easy).
In risk management, there is no official definition. Risk has been characterised by various scholars according to their level of understanding.
One definition of risk is “Risk implies exposure to uncertainty or threat” (Kannan and Thangavard, 2008) and “a decision to do nothing to explicitly avoid the opportunities that exist while leaving threats unmanaged” (Webster, 2007). Risk can also be described as the combination of an event’s likelihood and effects (ISO/IEC Guide 73).
Therefore, risk management is a proactive method to decrease dangers, boost opportunities, and optimise attainment of objectives (Pearce and Robinson, 2000; Webster, 2004; Grey and Larson, 2006; Rejda, 2001).
Furthermore, Andy Osborne (2012) defines risk management as an organised and cohesive method to identifying, analysing, and managing risks that affect strategy, process, people, and technologies.
“Prior the emergence of ERM, organisations used to handle their risk individually and independently, using the traditional ways of risk managements of” :
• Identification
• Evaluation
· Control.
Companies have realised that treating their risks as a whole (portfolio) will benefit them more in terms of reducing expenses and expenditures associated with risk management. And this is how ERM came into existence in 2004. Olaf Passenheim (2011).
ERM is a complete approach to risk management in an organisation (Olaf Passenheim, 2011). ERM is a risk management framework that considers all sorts of risks that an organisation faces, including strategic, financial, operational, and hazard risks. These frameworks describe how an organisation can implement ERM (Olaf Passenheim- 2011).
ERM is normally determined and implemented by senior management of an organisation, and once decided, it is passed down to other staff of the organisation until it reaches the lowest rank of the organisation. This is because everyone needs to understand how risk is managed in their organisation.
In the corporate context, COSO (2004) also states that enterprise risk management is the best tool to be employed in countering all risks available and creating damages to the industry; using its frameworks guide of:
§ Strategic Risk.
§ Operating Risk
§ Financial/Reporting Risk.
§ Hazard/compliance risk
§ Enterprise risk management reduces the impact of potential financial losses by:
§ Identifying possible causes of loss
§ Assessing the financial impact of a loss event.
§ Implementing controls to reduce losses and financial repercussions (Olaf Passenheim, 2011).
A closer look at enterprise risk management in pharmaceutical companies reveals that Fidson Healthcare Limited faces numerous hazards that must be managed effectively. Some of the hazards include IT risk, financial reporting risk, environmental or legal risk, production risk, and administrative risk.
With all of the industry’s risk exposures, the industry needs to set risk management goals that include protecting the industry from downside risks, managing volatility around business and financial results, and optimising risk and returns for Fidson Healthcare Ltd.
1.1 Statement of the Problems
Some pharmaceutical businesses use traditional risk management methods to manage particular risks such as fire and theft, but may overlook major risks encountered during operations.
Pharmaceutical businesses invest time and resources in managing traditional risks, which can result in significant losses if not addressed appropriately.
Most pharmaceutical businesses lack knowledge and experience with sophisticated risk management (ERM) practices.
Some pharmaceutical businesses who have adopted ERM as a viable approach of controlling corporate risk find it difficult to cover the entire ERM frameworks, instead focusing on a portion and paying little or no attention to the rest.
These have given the industry a reputation for poor profitability and return on investment.
1.2 PURPOSE OF THE STUDY
The purpose and objectives of this research study are:
1.To understand and assess Fidson Healthcare Limited’s past risk management plan.
2. Determine whether ERM is being utilised to manage risk at Fidson Healthcare Limited.
3.To identify the most commonly utilised ERM frameworks in Fidson Healthcare Limited.
4. To understand and assess the problems Fidson Healthcare Limited faces in managing risk using the chosen ERM framework.
1.3 RELEVANT RESEARCH QUESTIONS
This study raised the following research questions:
§ What was Fidson Healthcare Limited’s previous risk management strategy?
Is ERM an effective risk management strategy for Fidson Healthcare Limited?
Which ERM framework is mostly utilised by Fidson Healthcare Limited?
§ What obstacles does Fidson Healthcare Limited face using ERM frameworks?
1.4 Relevant Research Hypothesis
The hypothesis was derived from the research questions to guide the researcher during the course of the investigation.
H0: The accepted ERM framework would have no substantial impact on Fidson Healthcare Limited.
H1: The selected ERM framework will have a positive and significant influence on Fidson Healthcare Limited’s risk management.
1.5Scope and Limitations of the Study.
The study focuses on the pharmaceutical business, including its people, management, and goods, and the information acquired will be specific to this industry.
Fidson Healthcare Limited, one of the fastest growing pharmaceutical firms in Lagos, will be focused on adopting COSO ERM Frameworks to manage organisational risks.
However, the researcher’s restricted time and financial resources necessitate a limited focus.
1.6 Significance of the Study
This study will be useful in the following ways:
§ It will greatly enrich the body of knowledge in the area of research.
This will educate industry, particularly pharmaceutical companies, on the importance of effective risk management through the use of Enterprise risk management tools and frameworks.
This study’s findings will inform Fidson Healthcare Limited’s usage of enterprise risk management to mitigate industry-specific risks.
Similarly, it will enable academics and scholars develop their expertise and offer a foundation for future researchers.
1.7 Definition of Terms
RISK: The likelihood of an unfavourable occurrence (Aneke J.I., 1998).
It is the uncertainty of loss (Dickson, 1981:11).
It is the possibility of loss (Dickson, 1981:11).
HARZARD: They are events or conditions that cause or increase the likelihood of loss as a result of a certain risk (Irukwu, 1990:67).
PERIL: It is the source of a loss or a loss-producing agent, without which no loss can occur, even if the occurrence is unpredictable (Aneke, 1998).
RISK MANAGEMENT is a proactive method to reducing threats and unfavourable impacts of risk, boosting opportunities, and optimising goal performance (Pearce and Robinson, 2000; Webster, 2004; Grey and Larson, 2006; Rejda, 2011).
ENTREPRENEUR RISK MANAGEMENT: A technique to reduce the negative effects of a potential financial loss in an organisation (Olaf Passenheim, 2011).
Hazard risk refers to any source that may produce injury or undesirable impacts, such as equipment lost due to natural disaster (Skipper and Kwon, 2007).
Financial risk is defined as any loss caused by economic conditions such as foreign exchange rates, derivatives, liquidity risk, or credit risk (Jones, 2006; Benston et al., 2003).
Strategic risks are the unpredictability of loss for an entire organisation, which might be business or non-profit (Li and Liu (2002).
OPERATIONAL RISK: The risk of direct or indirect loss caused by inadequate or failed internal processes, people, and systems, as well as external occurrences (Basel Committee 2001).
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