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ENTERPRISE RISK MANAGEMENT IN PHARMACEUTICAL
COMPANY (A CASE STUDY OF FIDSON HEALTHCARE
LIMITED.)
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 18
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 37
Companies
2.11 How Pharmaceutical Companies manage
these 39
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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