THE ENTERPRISE RISK MANAGEMENT IN PHARMACEUTICAL COMPANY
ABSTRACT
How pharmaceutical companies successfully implements an Enterprise Risk Management (ERM) programme, to identify and manage potential risks, can mean the difference between financial freedom and financial despair. The Committee of Sponsoring Organization (COSO) guidelines, a voluntary private sector organization in the United State, has developed internal control guidelines to provide guidance to executive management and governance entities on critical aspects of organizational governance, business ethnic, internal control, fraud and financial reporting. This chapter will discuss an approach to build an ERM implementation plan within Fidson Healthcare Limited, by outlining the responsibilities and influence of industry participants, sales forces, middle- management and senior leadership and the ways in which they focus on monitoring and developing the risk mitigation process. The influences of technologies are integrated and new directions, such as e-mails and e-detailing. Thus, in order to mitigate business risk, some companies use Enterprise Risk Management concept (ERM, developed by COSO) to establish an effective corporate management system. The researcher is thus, quickening to use this piece of study to evaluate the need of ERM in Fidson Healthcare Limited. Data were sourced from the primary and secondary sources of data, using words by other authors and information gathered from the oral interview carried out on the respondent. Hypothesis was formulated and tested using Chi- square method. Finally, it was discovered that there is need for Enterprise Risk Management tools Pharmaceutical Companies (Fidson Healthcare Limited), for them to achieve their business objectives and for effectiveness in running of their businesses.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
In the business world, every individual and businesses are exposed to risk. For any business to exist and survive, the business has to go through some challenges of risk. Risks are in existence simply because entities, companies and organizations have ‘assets’ of a material or immaterial nature that could be subject to physical harm that has consequences on the known entity (Andy Osborne 2012- Risk Management made easy). In Risk management, there is no formal definition of. Risk has been defined by different scholars based on their level of understanding. One of such definition of risk is “Risk implies exposure to uncertainty or threat (Kannan and Thangavard, 2014) and “a decision to do nothing to explicitly avoid the opportunities that exists and leaving threats unmanaged.”(Webster, 2007). Also, Risk can be defined as the combination of the probability of an event and its consequences (ISO/IEC Guide 73).
Risk management therefore, is a proactive approach to reduce threats, increase opportunities, and optimize achievements of objectives (Pearce and Robinson, 2000, Webster, 2004,’ Gray and Larson, 2006.’Rejda, 2001). Also, Andy Osborne 2012 says risk management is a structured and coherent approach to identify, analyze and manage risks that affects the strategy, process, people and technologies. “Prior the emergence of ERM, organizations used to handle their risk individually and independently, using the traditional ways of risk managements of”:
· Identification · Evaluation · Control
As time goes on, companies now realized that it would favour them more to treat their risks as a whole (portfolio), as would surely reduce its costs and expenditure incurred in managing risk. And that was how ERM came into existence in 2004 Olaf Passenheim, 2011). ERM is a holistic way of treating risk in an organization, Olaf Passenheim-2011). ERM is a risk cover that takes into considerations, all types of risks faced by an organization, such as – Strategic, Financial, Operation and Hazard risks. These frameworks are the ways ERM can be effected by an organization (Olaf Passenheim- 2011).
ERM is usually decided and effected by senior managers of an organization, and after the decision is taken, it passes on to other personnel of the organization, until it gets to the lowest rank of the organization. This is because; everyone has to have knowledge of the way risk is being managed in their organization. In the corporate environment, COSO (2004) also says Enterprise risk management is the best tool to be used in combating all risk available and causing damages to the industry; using its frameworks guide of:
§ Strategic Risk
§ Operational Risk
§ Financial/Reporting Risk
§ Hazard/Compliance Risk
§ Enterprise risk management is a procedure to minimize the adverse effects of a possible financial loss by:
§ Identifying potential sources of loss
§ Measuring the financial consequences of a loss occurring.
§ Using controls to minimize actual losses or their financial consequences (Olaf Passenheim-2011).
A closer look on Enterprise risk management in pharmaceutical company reveals that in Fidson Healthcare limited, that there are lots of risks that need proper management. Some of the risks are IT risk, financial reporting risks, environmental or legal risks, production risk and administrative risk. With the situation of all risk exposures in the industry, the industry needs to set goals of risk management which are to protect the industry against downside risks, to manage volatility around business and financial results of the industry and to optimize risk and returns of Fidson Healthcare Limited.
1.2 STATEMENT OF THE PROBLEMS
§ It’s been discovered that some pharmaceutical companies, considers and handles their risk individually and independently( Traditional ways of risk management); like fire risk, theft risk and so on, thereby neglecting some main risk they encounter during operations. § Also pharmaceutical companies spend much time and resources in handling those risk traditionally, and when not properly handled, lead to huge losses on their part. § It has also been discovered that most pharmaceutical companies, have not been introduced to or have knowledge of a more advanced and effective way of managing risk (ERM) in their organization.
§ Also, some of the pharmaceutical companies who have adopted ERM as a practical way of handling corporate risk find it difficult to cover the whole ERM frameworks; rather, they concentrate on a section of the frameworks and pay little or no attention to the others. These have been giving the industry a reputation of low profitability and returns on investments.
1.3 OBJECTIVES OF THE STUDY
The aim and objectives of this research study are:
1.To know and examine previous risk management strategy used by Fidson Healthcare Limited.
2.To know if ERM is being used to manage risk in Fidson Healthcare Limited.
3.To find out the mostly used ERM frameworks in Fidson Healthcare Limited.
4. To know and examine the challenges faced by Fidson Healthcare Limited, in the chosen ERM framework in managing their risk.
1.4 RELEVANT RESEARCH QUESTIONS
The following research questions were raised from this study:
§ What previous risk management strategy was used by Fidson Healthcare Limited in managing their risk?
§ Is ERM a practical option for managing risk in Fidson Healthcare Limited?
§ Which of the ERM frameworks is mostly used by Fidson Healthcare Limited?
§ What challenges does Fidson Healthcare Limited encounter in the course of using the ERM frameworks?
1.4 RELEVANT RESEARCH HYPOTHESIS
The hypothesis was extracted from the research questions, to guide the researcher in the course of this study.
H0: There would be no significant influence of the adopted ERM framework on Fidson Healthcare Limited.
H1:There will be positive significant influence of the adopted ERM framework on Fidson Healthcare Limited’s risk managements.
1.6 SCOPE AND LIMITATIONS OF THE STUDY
The study focuses on pharmaceutical industries; their employees, management and their products, while gathered information will be within this industry. Specifically, Fidson Healthcare limited will be focused on, among the fast rising pharmaceutical companies based in Lagos, using COSO ERM Frameworks in managing their organizational risks.However, the limited time scarce and financial resources at the researcher’s disposal, calls for this limited scope.
1.7 SIGNIFICANCE OF THE STUDY
This study will be beneficial in the following ways:
§ It will be of immense benefits to body of knowledge in the area of investigation. § It will serve as an instrument of enlightenment to industries, especially pharmaceutical companies on the need for an effective management of risk using Enterprise risk management tools/frameworks. § The finding of this study will also provide a basis where Fidson Healthcare limited will use Enterprise risk management to safe and secure the business risk of the industry.
§ Similarly, it will help academia and scholars to expand their frontiers of knowledge and provide s basis from which future researchers may benefit.
1.8 DEFINITION OF TERMS
RISK: Is the possibility of an unfortunate occurrence (Aneke J.I (1998).
It is the uncertainty of a loss (Dickson (1981:11).
It is the chance of loss (Dickson (1981:11).
HARZARD: They are events or conditions that creates or increases the chance of loss arising from a given peril (Irukwu(1990:67).
PERIL: It is the cause of a loss or a loss producing agent, without which there can be no loss, even though the uncertainty of event may exist (Aneke(1998).
RISK MANAGEMENT: Is a proactive approach to reduce threats and adverse effects of risk increasing opportunities and optimize achievements of objectives (Pearce and Robinson(2000; Webster(2004; Gray and Larson(2006; Rejda(2011).
ENTREPRISE RISK MANAGEMENT: Is a procedure to minimize the adverse effects of a possible financial loss in an organization (Olaf Passenheim(2011).
HAZARD RISK: It refers to any source that may cause harm or adverse effects, such as equipment lost due to natural disaster (Skipper and Kwon, 2007)
FINANCIAL RISK: It refers to any loss due to economic conditions such as foreign exchange rates, derivatives, liquidity risk and credit risk (Jones, 2006; Benston et al.,2003) .
STRATEGIC RISKS: Is the uncertainty of loss of a whole organization and the loss may be profit or non-profit (Li and Liu (2002).
OPERATIONAL RISK: It refers to risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events (Basel Committee (2001).