OT.: Long but good read:
New Booz Allen Report Reveals Causes for Shareholder Value Destruction; Companies Are Focused on Compliance, but Strategy and Operational Mistakes Destroy More Shareholder Value
Business Wire - November 18, 2004 12:03
Effective Risk Governance the Key to Preserving Value and Encouraging Growth
NEW YORK, Nov 18, 2004 (BUSINESS WIRE) -- Is compliance the biggest issue for business today? In recent years, corporate missteps have wiped out hundreds of billions of dollars in shareholder value, in industries ranging from telecom to energy to healthcare. The result has been a compliance backlash, with an onerous wave of regulatory reform that threatens to hinder growth and innovation. However, a new report from management consulting firm Booz Allen Hamilton found that more shareholder value has been destroyed in the past five years as a result of strategic mismanagement and poor execution than was lost in all of the recent compliance scandals combined.
Booz Allen analyzed approximately 1,200 firms with market capitalizations over $1 billion as of 12/31/1998 for the five-year period from 1999 through 2003 and identified the poorest performers - the 356 companies that trailed the lowest-performing index for that period, the S&P 500. The companies lost more than 2 percent a year in shareholder value on a Compound Annual Growth Rate basis over the five-year period.
The results were startling - only 13 percent of the decrease in shareholder value in these companies resulted from compliance failures. Sixty percent of the value destruction was attributable to strategic mistakes, such as misjudging customer demand or competitive pressure, or management ineffectiveness. An additional 27 percent was due to operational blunders, such as cost overruns or poorly managed integration during mergers and acquisitions.
"The problem runs deeper than a few bad apples, and compliance is not the main culprit in the destruction of shareholder value," notes Booz Allen Senior Vice President Paul Kocourek. "Risk governance is the key to finding the balance between control and innovation. Companies need to develop a process that both protects shareholder value, by eliminating earnings surprises, and also enhances it, by fostering growth."
Booz Allen identified five imperatives for developing a risk governance program that fosters growth while managing risk:
-- Define what constitutes risk and develop early-sensing
mechanisms - expand the definition of risk beyond the
traditional; consider threats to earnings drivers such as
customer churn, as well as cultural risks, such as misaligned
incentives or communications breakdowns.
-- Determine the risk agenda - establish priorities and build the
capabilities that ensure a company is able to handle risks
when they occur.
-- Build or adapt the risk management architecture - identify the
processes, organization, information and cultural tools needed
to manage risk.
-- Make risk management part of strategic planning - help the
company drive growth, as well as deliver compliance.
-- Adapt to changes in the risk environment - stay flexible and
responsive enough to adjust quickly to changing market
dynamics.
Industry findings
The study revealed significant industry differences in its examination of shareholder value destruction. Strategic losses were the most common cause in the telecom, media, tech and manufacturing industries, at 70 percent of the total. By contrast, strategic losses made up only 30 percent of the total in energy, and 42 percent in the transportation industry.
Operational losses were highest in the transportation (50 percent) and energy (48 percent) industries. Energy (22 percent) and financial services (21 percent) had the greatest compliance-related losses, but compliance was consistently the smallest factor overall in shareholder value destruction. International results were relatively consistent, with one exception - in Latin America, strategic losses were lower than the global average, (50 percent vs. 60 percent), but compliance losses averaged 25 percent of overall decline in shareholder value, nearly double the global average of 13 percent.
"Risk management needs to be about more than compliance with regulatory mandates - it should be a tool to position a company for uninterrupted growth," said Booz Allen Principal Jim Newfrock. "Companies that take a narrow and defensive approach and reduce risk management to a 'box-checking' activity will have a harder time innovating and growing in today's networked, global economy."
To obtain a copy of the Booz Allen report, "Too Much SOX Can Kill You; Resolving the Compliance Paradox," contact Karen Guterl at guterl_karen@bah.com.
About Booz Allen Hamilton
Booz Allen Hamilton has been at the forefront of management consulting for businesses and governments for 90 years. Booz Allen, a global strategy and technology consulting firm, works with clients to deliver results that endure.
With more than 15,000 employees on six continents, the firm generates annual sales of $2.7 billion. Booz Allen provides services in strategy, organization, operations, systems, and technology to the world's leading corporations, government and other public agencies, emerging growth companies, and institutions.
Booz Allen has been recognized as a consultant and employer of choice. In a 2003 independent study by Kennedy Information, Booz Allen was rated the industry leader in performance and favorable client perceptions among general management consulting firms. Additionally, Working Mother has twice ranked the firm among the top 10 in its "100 Best Companies for Working Mothers" list.
To learn more about the firm, visit the Booz Allen Web site at www.boozallen.com. To learn more about the best ideas in business, visit www.strategy-business.com, the Web site for strategy+business, a quarterly journal sponsored by Booz Allen.
SOURCE: Booz Allen Hamilton
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