5 - The External Environment

Summary

Introduction

The external risk management environment refers to everything that can affect the risks faced by an institution and the way those risks are managed. These factors are not uniform, and vary by industry and geographical location. Even within a particular industry in a particular country, different types of firms might find themselves in different environments. Small firms might be treated differently from large ones, and privately held ones will certainly be treated differently from publicly quoted ones. The list of potential firm-specific factors is extensive – but the important point here is that it is not sufficient simply to look at the industry and location and decide that all firms will be treated the same; rather, it is important every time to consider the nature of the firm and how this affects the external context.

External Stakeholders

Since it was established in the previous chapter that the number of internal stakeholders was small, it follows that the number of external stakeholders that might exist is large. All principals except the owner-managers are external to the institutions. This means that the other holders of bank and insurance company debt and equity are external, as are pension scheme sponsors; all customers, policyholders, pensioners and other beneficiaries are external; and clearly the government, the markets and any statutory insurance arrangements are external.

By contrast, the agents are generally the insiders. This is particularly true for banks and insurance companies, where only trade unions and external auditors can be considered external; however, for pension schemes, foundations and endowments, where more facilities are likely to be outsourced, then functions such as investment management and benefit administration are also frequently external.

Professional and industry bodies and regulators are also external to the organisations considered here, and both have an important impact on the environment in which they operate. In particular, professional bodies and regulators have an impact on the way in which individuals within organisations must behave, whereas industry bodies and regulators influence the way in which the organisations themselves act.

Advisers to financial organisations also contribute to the environment in which those organisations operate. To a large extent this is through the context of the regulatory and professional regime in place; however, it can also be more broadly about the way in which various types of advisers have developed in a particular region or industry, or in relation to particular types of firm.