Managing Business Risk in Bangladesh: The Turnbull Guidance

1. Introduction
   Risk in an invariable part of business. Every business hasto make decisions that have potential risks entailed with the expectation of return. In order to succeed, every business need to manage the tradeoffs between the downside of risks as well as the potential upside of risks of any decisions.This is evident from a global phenomenon where companies such as Dalkon Shield, Tylenol, Johns-Manville, Union Carbide who were one corporate giants in their fields of business but have since suffered huge losses due to taking risks ( Boodman, D. M., 1987). Thus, from a global context due to the advent of new technology, operational methods, political instability, narrowing of cultural gaps, stricter environmental and organizational health and safety regulations, the need for businesses to manage risks has already become a top priority.

In the case of Bangladesh, the economy is in its transition process from being an agrarian economy to a manufacturing and service based economy. As such, It has been relatively unaffected by changes in the global economy. According to Spedding, L. et al. (2008) there have been very few corporate scandals that have been enough to be classified as a major shockwave to undermine business confidence and Amir and Amir (2011) points out,the economy was relatively unaffected by the global recession of 2008-2009, where Bangladesh in fact performed relatively well along with other Asian countries.However, the country has made significant progress to improve its business climate post its independence by undertaking legislative reforms and liberal FDI regimes. As a result Bangladesh has since become the third easiest country in which to do business in South Asia as reported by World Bank-International Financial Corporation report (2006) cited inAmir and Amir (2011).
Due to Bangladesh’s rapid improvements in economic potential and the open regime therehas been an overall growth in domestic and the multinational corporations (MNCs) in the country (Bristy, J. F. 2015). This coupled with the increasing awareness of environmental social, political issues among all stakeholders has created an extra pressure for the companies in Bangladesh, both domestic and MNCs to care about the ways they their business and manage the risks. There have been various studies previously conducted on environmental and political risks facing Bangladesh, highlighting the fact that these are the two major risk management issues highlyconsidered by companies in the country. However, as the Bangladesh economy keeps on growing and slowly transforming from an emerging market to a developed market, the companies need to shed light on risks factors prominently being addressed by the global economy if they intend to survive in the long run. Considering this importance, this study aims to shed light on both current and potential risk factors to be faced by Bangladeshi companies and suggestions by referencing to established risk management techniques.

1. Risk, Uncertainty and Risk Management
   Literature review of journals and books addressing risk management has provided several definitions of risk. Peter C. Young, P. C. et al. (2000) as reviewed by Peter R. Kensicki, P. R. (2001) definesrisk in a more traditionally terminology stating that risk is a “variation in the outcomes around an expectation”. It goes on further to offer a simpler definition which is "uncertainty regarding loss" for those new to the concept. Other authors have also cited a similar definition of risk which is “uncertainty concerning the occurrence of a loss’’ (Regda, 2007).It is evident that uncertainty is pertinent to defining risk.According to Carbonara and Caiazza (2010) uncertainty is a situation in which decision makers have limited knowledge to exactly describe future outcomes. Therefore, the domain of risk is smaller than uncertainty. Considering the above definition Marsh & McLennan (2013) have identified top 20 of the most likely risks faced by business today:

Table 1: Top 20 Risks

1. Economic conditions
2. Business disruption
3. Legal or regulatory shifts
4. Litigation or claims
5. Regulatory compliance
6. Brand/reputation
7. Natural disaster
8. Cash flow/liquidity
9. Insurance (availability, limits, claims payment)
10. Destruction/loss of physical resources
11. Workforce health and safety
12. Industry or sector-wide events
13. Capital availability
14. Technology/systems failure
15. Talent availability
16. Business continuity/crisis management execution
17. Data security/privacy breach
18. Competitors
19. Destruction/loss of human resources
20. Market forces (demographics, trends, etc.)

This study will address most of the above risks the companies in Bangladesh are exposed to most due to the countries social, environmental, demographic, political and economic conditions.

Similarly, there areseveraldefinitions of risk management.Among them Regda (2007) states that ‘‘risk management is a process that identifies loss exposure faced by an organization and selects the most appropriate technique for treating such exposures.” In this definition, loss exposure is any situation or circumstance in which a loss is possible, regardless of whether a loss occurs. This captures the true essence of risk management, in that, it defines effective risk management as a process of ingraining certain qualities and traits into the structure, operations, and culture of a company so that those traits not only serve the company well when a major disaster hits, but also help the company compete more effectively and in more sustainableways during the stable periods (Elahi, E., 2013). Other studies have defined risk management as the process of acquiring certain qualities to reduce the impact of risk. According to Hamel and Valikangas (2003) these qualities include:

Table 2: Qualities an organization needs to acquire for effective risk management
• Cultivating a risk awareness culture.
• Setting proper levels of risk appetite in different parts of the organization.
• Recognizing potential risks.
• Detecting an evolving or happening risk.
• Assessing the likelihood and impact of risks.
• Assessing the potential benefits and opportunities associated with risks.
• Categorizing and prioritizing risks.
• Transferring/sharing risks.
• Preventing/reducing the probabilities of risks.
• Mitigating the impact of risks.
• Reducing the sensitivity of the organization to risks through flexibility and agility.
• The ability to quickly recover from a realized risk.

The effectiveness of these qualities depend on the extent to which an organization is able to embed them into the structure, culture, and the operational processes of the organization.

1. Analysis of significant Risks faced by companies in Bangladesh
   Businesses inBangladesh are subject to risks unique and specific to the country. The following are some of the major systematic risks faced by businesses in the country:

Politics: The country is subject to political confrontations due to the antagonistic relationship between the two major political parties. As such there are frequent strikes, blockades and vandalisms which have an adverse impact on the businesses. Due to such political turmoil the country especially in the first three months of 2015, businesses have suffered huge losses (Gov.uk, 2015). In addition to that local leaders and politically backed cadres subject businesses to expropriation and as such political backing plays a major role in a company’s smooth of functioning of the business.

Regulatory compliance: Bribery and corruption is widely practiced by almost all of Bangladesh’s regulatory agencies which puts a lot of pressure on new start-ups as well as existing businesses. An example may be property registrationand construction permits where obtaining zonal clearance, expediting inspection approvals, getting environmental clearance, building permits etc. are very swift and without any regulatory hassle if bribes are given to the relevant agencies (World Bank, 2015).

Workforce health and safety: Majority of the country’s exports consists of readymade garments including knit wear which consists of more than 75% of exports revenue (Amir and Amir, 2011). Although the contribution of the RMG sector has been impressive, major catastrophes over the past years have posed serious risks to the sectors reputations, supply chains, and overall public safety. As already mentioned, regulatory compliance and inspections can be passedeasily through unofficial payments. As such examples mentioned by Marsh & McLennan (2013) such as the 2013 Rana Plaza collapse revealed that deficiencies had been previously observed, including the discovery of cracks in the building, despite which the factory remained open. Another example is the 2012 Tazreen Fashion fire where investigations following the incident showed that a major retailer was aware of safety deficiencies, but did not implement reforms or invest the required capital to improve fire safety.
Supply Chain failure: One of the reasons for Bangladesh’s overdependence on the textile industry is because it is the central sourcing location for the industry’s largest markets, including Europe and North America. These retailers are global organizations that provide apparel to prosperous markets in the West and Asia. As such any disruption in the supply chain caused by catastrophes tend to increase the cost of doing business for international retailers and textile manufacturers. They also pose risk to their reputation since it attracts negative attention from consumers, the media, and others. For the major retailers, this is simply too much time to take a loss and so supply gets siphoned off to other developing countries (Marsh & McLennan, 2013).In addition to physical catastrophes affecting retail sector, Bangladesh is also extremely vulnerable to natural disasters like floods, droughts and cyclones due to its geographical location. This further plays a part in downgrading domestic as well as foreign supply chain due to damaged infrastructure (World Vision, 2011).

Labor Market Regulations: Minimum wages for workers in Bangladesh is about US$ 0.23 per hour. This is one of the world’s lowest minimum hourly wages (Marsh & McLennan, 2013). With labor costs rising in other competing countries like China, the prospect of utilizing the cheap labor is very attractive for domestic as well as foreign companies. However, poor implementation labor laws and regulations have led to problems such as redundancy of workers and the rigidity of working hours which poses major risks such as loss of human resource, reputation of organization and also regulatory compliance. The major Labor law relating to employment of workers, determination of minimum wages, payment of wages, compensation for injuries arising out of and in the course of employment, formation of trade unions and related issues is the Labour Act 2006. These labor rights are subject to scrutiny in light of the Rana Plaza, Tazreen and other tragedies. Trade unions do exist but are subject to a number of restrictions and alleged harassment(Gov.uk, 2015). As mentioned by Marsh & McLennan (2013) an example is the murder of Aminul Islam, a labor activist, in 2012 following the Tazreen Fashion fire. According to media reports, labor organization and activity grew following his death. Furthermore a detailed survey done by World Bank (2015) based on labor market regulation revealed major noncompliance. According to the survey completed by local lawyers and public officials there are no Major restrictions on night works and weekly holidays for most full time employees. In addition, the survey revealed that there is no third party approval required before and employee terminates up to 9 workers even though third party notification is required. In addition there is almost no formal retraining or reassignment obligation before redundancy of a worker. There is also major deficiencies in the Social protection schemes and benefits of workers. The survey revealed that there is no availability of unemployment protection scheme for redundant workers and no Health insurance requirement for permanent workers in most private and public companies (World Bank, 2015). Child labor is also widely practiced in the informal employment sector even though it is prohibited by the Labour Act of 2006.

In addition to the above, other factors such as Intellectual Property rights, Terrorism Threats, IT Security, people’s resistanceto change and Organized Crime contribute to the overall risks faced by companies in Bangladesh today. Organizations in Bangladesh need to identify, understand and manage these risks in a way that best suits their capabilities.

1. The Turnbull Guidance to Corporate Risk Management and Internal Control:
   With so many factors to consider and the overall unpredictability of risk, many directors may face difficulty in implementing an effective organization wide risk management approach. As such an established approach as a reference is always preferable. This study applies The Turnbull Guidance on corporate governance as a guidance because although the traits for an effective risk management system are not new, the Turnbull guidance of a holistic approach that integrates those separate traits under a risk management policy is an innovative and effective regulatory approach. The guidance was introduced by the Institute of Chartered Accountants of England and Wales (ICAEW) as a guideline for the directors of UK listed companies to develop a system of internal control that makes risk management an integral part of it (McCrae and Balthazor, 2000).

4.1 Turnbull Guidance: Top- Down Approach
The main notion of the guidance is that the directors have the ultimate responsibility for determining the nature and extent of the risks the organization is willing to take in order to achieve its corporate objectives. They are also responsible for formulating an organization wide risk management policy that has been communicated and accepted as a corporate policy throughout the organization. After the risks have been identified and policies formulated the directors have to ensure periodic reviews are carried out to ensure the policies are effective and the results are reported to the shareholders in the form of an annual report (ICAEW, 1994). Thus Turnbull guidance makes risk management process a top-down approach by making the directors accountable. The following table shows the elements of risk management prescribed by the Turnbull Guidance:

Table 3: Required elements of risk management according to Turnbull Guidance

1. Development of accepted corporate policies for risk management.
2. Implementation of accepted risk management policies through risk-based internal control systems capable of continuously monitoring the corporate internal and external risk environment.
   3.Periodic reviews of the risk-based IC systems(at least annually)to quality-assure on-going effective control of organization-wide risk in a dynamic environment.
3. Annual reports of compliance on risk management policies and effective risk management, with reasons for any non-compliance.

4.2 Turnbull Guidance: Risk Management Process
For the purpose of developing risk management policies the Turnbull Guidance requires the directorsandmanagers to design riskmanagement strategies(long-term)andplans(immediate actions).Riskmanagement strategy involves identifying, analyzing and planning to determine and implement allthose measuresnecessaryfordetermining a reasonable andacceptablelevelofcorporaterisk that best suites the organizations capabilities,andthenformanagingthe risks soastoavoidexceedingthatlevel. Risk management processes have been suggested by several authors and studies, and almost all of them have mentioned the steps illustrated by Bekefi, T and Epstein, M. J. (2006) shown in figure 1 below. Since most of the steps have been widely discussed by risk management books and journals, this study only focuses on the specific steps most applicable and necessary for companies in Bangladesh.

4.2.1 Risk Identification
The first step in the risk management process is identifying possible sources of loss and, thus, risks. This involves identifyingthoseriskswhich,associatedwithbusiness activities,maypreventorhinderachievementofbusinessobjectives.
Hollman and Mohammad-Zadeh (1984) have mentioned three different methods the managers can use to identify risks of loss:

1. Systematic reviews of all data on company assets, activities and staff: The manager must review, inspect and monitor all activities of the company in which they sense the possibility of risk. This involves identifying all the risks mentioned above in context of Bangladesh that are most likely to affect the company. For example,loan defalcation can be a major source of risk for banks in Bangladesh.
2. Using financial statements to identify the sources of potential financial losses: The risks identified need to be qualified to assess the financial impact. Preparing accurate budgets and financial statements would help identify the overall financial gains and losses due to the risks undertaken.
3. Using flow charts to analyze all operations or activities of the enterprise: This further helped to identify the likely hood and magnetite of the risks on the overall business.

4.2.2 Riskanalysis: After Identifying the risks, the next step is to analyze the potential extent of the risk and the impact it is likely to have on the organization. The process can be assisted by prioritizing the identified risks according to their importance for the company.Tamara Bekefi, T & Marc J. Epstein, M. J. (2006) have divided risk analysis into Internal Analysis and external analysis:

1. Internal Analysis: Internal analysis involves assigning employees specifically for the task of analyzing risks. This could involve assigning supervisors, branch managers, internal audit teamsresponsible for monitoring and reporting the risks according to company specifications. Apart from assigning company personnel’s, internal analysis can also be done by liaising with people locatedinkeylocationswho interfacewithlocalandnationalsocialand politicalentitiessuchaslocalleaders, politicians,NGOsandcommunities,since they have the influence and knowledge of the businessenvironment andthereforeunderstandhow particularsocialandpoliticalissuesmayaffect thecompany.
2. External Analysis: For large corporations and potential foreign investors, there are analysis firms that supply business specific and country specific reports. This could involve credit rating companies, local external audit firms or even international risk analysis firms like Lex Mundi or even EurasiaGroups that provide country specific risk analysis reports.
   4.2.3 Selection of Techniques
   Several tools and methods are available for handling risks. Some methods applicable to companies in Bangladesh have been mentioned below:
   Insurance: This can be a primary tool for managing risks associated unexpected events like fire, flooding, property damage due to political and social unrest or personal injury. Since these issues are common in Bangladesh having some kind of insurance coverage is very important. In addition even though for small companies insurance may be associated with considerable cost, getting it may be advantageous since insurance involves compliance with certain statutory requirements, as such it forces management to examine risks with scrutiny.
   Improved compliance process: Compliance audits have been performed by Bangladeshi companies since the 1990s. However, these processes and procedures have proven ineffective in preventing tragedies like Rana Plaza collapse or Tazreen fire. Organizations such as Business Social Compliance Initiative (BSCI) have proven ineffective sine such audits have focused on product quality rather than worker safety and construction faults. As such as the Marsh & McLennan (2013) study points out, organizations looking to improve their compliance audit process and safeguard their reputation can implement a more standardized and less manipulative process. The study proposes implementing the following processes:

Table 4: Suggested techniques for effective compliance
• An expanded audit checklist.
• Longer audits (lasting days as opposed to hours, and greater depth of document reviews).
• More frequent unannounced inspections.
• A detailed company factory and production ratings system with formalized corrective action planning and return audits.
• Information systems upgrade to provide a state-of-the-art factory and production conditions database that can moreeffectively target problem areas/sites.
• Greater worker engagement in compliance audits (greater awareness of the process, anonymous feedback/ questionnaires, and reporting).
• 24/7 remote surveillance via webcam.

Capital market: Companies can transfer different types of risk such as liquidity risk, credit risks and interest rate risk to investors in the capital market at fair market price. This way, not only is the risk transferred but the companies get access to large source of fund. Although engaging in capital market is not feasible for small companies and there are certain risks involved, this is a prospective risk management technique.
Overcapacity in production. Excess capacity in warehouse and inventory can prevent interruptions in production and delivery problems which are more often present in local manufacturing companies of Bangladesh due to political and environmental unrests.

Selection of suppliers: According to Falkner, E. M & Martin R. W. (2015), supplier’s selection can also play a major part in risk management. The companies can enter into contracts with individual suppliers to influence their behavior. This contracts could involve some kind of performance guarantee that requires constant quality of the products supplied and may incorporate penalties. Such policies can be very effective especially for the Pharmaceuticals companies in Bangladesh. In addition, foreign buyers enforcing such contracts with local apparel producers can also force them to ensure quality.

Emergency plan: Falkner, E. M.and Martin, R. W. (2015) states that having some kind of contingency or continuity plan in case of natural disasters or terrorist attacks may be very important for companies prone to such external risks. This could involve implementing emergency exits and procedures extractions of employees and equipment’s inthe event of calamities. Having temporary relocation plans is also helpful if the need arises.

Networking/ cooperative relations: Having close relationships with influential personnel’s such as political parties, regulatory authorities, suppliers and customers is an effective technique to manage risky situations. Networking may be by hiring employees or assigning consultants who already have established relationships with influential personnel’s and are proficient in working through the regulatory dreadlocks. This can largely help avoid or mitigate the extent of bribery or corruptions an organization has to face while conducting business. In addition, close relationships with suppliers or existing clients can ensue repeat purchase and in turn attract new customers through word of mouth. For this, good cooperation and ridged quality control is a mandatory.

4.2.4 Strategy implementation
After risks have been identified and techniques selected, they need to be applied by integrating the chosen methods into the company’s overall internal control process. According to Falkner, E. M & Martin R. W. (2015) the process should ensure that all affected employees are informed of the risk management objectives of the company and a culture is developed for constant awareness and scrutiny.

4.2.5 Effectiveness review and Control
The final step in risk management process is to regularly review the introduced techniques and corrective measures for any deficiencies. The Turnbull Guidance makes the directors responsible for conducting this review process and ensuring its effectiveness. As McCrae and Balthazor (2000) points out, the review process should have the ability to identify and prioritize the risks, compare them with predetermined levels and reduce the impact and incidence of the effects of risk on the achievement of business objectives

4.2.6 Risk management reporting
This step differentiates Turnbull from other risk management guidance’s. This is because Turnbull Guidance requires companies to submit annual reports to shareholders and other stakeholders regarding the risk governance policies it has applied and also any special circumstances that caused the company to adopt a particular approach.

1. Conclusion
   Implementing and practicing risk management policies and procedures by taking reference from the Turnbull Guidance can be a necessary step in managing the overall risks faced by businesses in Bangladesh today. The guidance has some deficiencies, such as the fact that it does not prescribe any specific format for the annual external reporting’s. In addition, the external reporting is not mandatory for private limited companies in Bangladesh. Implementing Turnbull and overcoming the deficiencies effectively calls for the overall organization and regulatory contribution. Steps such prescribing a format specific to different organizations and making it mandatory for private companies earning profits above a certain range to report their risk.

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