ABSTRACT
Risk is at the center of life itself. 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. As a practical
option for managing risk, it is associated with a number of factors that hamper
its smooth flow. These difficulties manifest when companies lack knowledge of
ERM Frameworks; still using the traditional ways of risk management. The
problems become more compounded when the adopted ERM frameworks would not fully
be utilized; as in the case with pharmaceutical companies in Nigeria. The researcher
then quickening to use this piece of study,
to evaluate the use of ERM in pharmaceutical companies, with its
associated prospects, challenges and problems. The researcher sourced data from
the primary and secondary sources of data for this work, using works by other
authors and information from the oral interview carried out on the respondent.
Despite the new accreditation guidelines and a provincial strategy for managing
risk, adherence to effective risk management remains suboptimal in our pharmaceutical
companies and in many industries. It was discovered that although ERM is being
implemented in Nigerian pharmaceutical industry, the level of implementation is
either very low or cannot be easily ascertained. Also, it was further
discovered, that there exist an insignificant but positive relationship between
ERM and total assets and liabilities as proxies for firm size and leverage. The
researcher made recommendation from the findings of this works that there is
need to encourage and adopt the full use of ERM frameworks in industries and
there is need for more explicit measures in identifying firms that engage in
ERM and those that do not.
TABLE OF CONTENTS
TITLE PAGE
Inside Title
Page ii
Approval
Page iii
Dedication iv
Acknowledgement v
Abstract vi
Table
of Content vii
CHAPTER ONE: INTRODUCTION
1.1
Background of the study 1
1.2
Statement of the Problems 4
1.3
Objectives of the Study 5
1.4
Relevant Research Questions 6
1.5
Scope and Limitations of the Study 6
1.6
Significance of the Study 7
1.7
Definition of Terms 7
CHAPTER TWO: LITERATURE REVIEW
2.0 Introduction 10
2.1 Concept of Risk 10
2.2 Objectives and Principles of Risk
Management 13
2.3 Historical Context of ERM 16
2.4 The
ERM Frameworks of Pharmaceutical Companies
2.5 Risks in Pharmaceutical Companies 23
2.6 The ERM process for Pharmaceutical
Companies 27
2.7 Risk and Economic Capital Models 30
2.8 Risk Tolerance in Pharmaceutical
Companies 31
2.9 Main Risk and Regulatory Requirements 33
2.10 Problems and Challenges in Pharmaceutical Companies
2.11 How Pharmaceutical Companies manage these Main Risks
CHAPTER
THREE: RESEARCH METHODOLOGY
3.0 Introduction 42
3.1 Research Design 42
3.2 Population of the Study 43
3.3 Sources of Data 43
3.3.1 Primary
Data 44
3.3.2 Secondary
Data 44
CHAPTER
FOUR: DATA PRESENTATION AND ANALYSIS
4.0 An Overview 45
4.1 Introduction 45
4.2 Analysis 46
CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND
RECOMMENDATION
5.0 Introduction 60
5.1 Summary of Findings 60
5.2 Conclusion 63
5.3 Recommendation 65
5.4 Suggestions for Further Studies 66
REFERENCES 68
APPENDICES 73
CHAPTER ONE
INTRODUCTION
1.1
BACKGROUND OF 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, 2008) 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.
1.1 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.
1.2
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.
1.3
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 framework?
1.4
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.
1.5
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.
1.6
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).
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