Do you really understand Risk?
Risk is illusive. In daily language it contains a negative connotation. Things that might go wrong. (“A four letter word.”) But seeking new opportunities entails risk; deciding which road to take into an unknown future. Risk is in the heart and blood of the business, and should be treated as such in all major decisions.
Risk is an integral part of corporate governance and should thus be analysed throughout the whole DNA-chain and nervous system of the organisation – from the letter of incorporation, through the AGM, the Board, executive management, operational management, employees and to the stakeholders they serve.
Why Enterprise Risk Management (ERM)?
The goal of ERM is to reinforce the achievement of objectives, i.e. create and protect stakeholder value. This is done by a change of mind-set regarding risk & reward and embedding processes that lead to improved information gathering, analysis and ranking of risks, which in turn leads to improved quality of decision making. Policies, frameworks, organisation, processes, technology etc are important; but most important are the actual outcomes.
The Main Key is the Business Model
- as well as the values and culture of the organisation. You need to understand the full value chain to detect and understand risks and opportunities. What matters the most?
What’s Your Appetite for risks?
Where are the profits and where are the risks? Are you taking risks in the wrong area? Or too little risk where the best opportunities lie? Has the board expressed how much risks is too much (or even too little)?
These risks are at the core of the business and can make or break the enterprise. Studies show that the largest proportion of corporate failures stem from 1) a wrong strategic decision or 2) the failure to execute an agreed strategy.
In light of several corporate scandals and the financial crisis following the latest crash on Wall St several regulators (e.g. SEC, FRC) and governance bodies (e.g. leading stock exchanges, OECD) have put increased pressure on boards that they ensure themselves that the organisation has an efficient risk management process in place and that they are well aware of the key risks facing the organisation going forward.
Establishing and Implementing ERM
ERM is not an easy journey to start on. You can’t do it by yourself. It’s a true team exercise and requires leadership, enthusiasm and endurance. It will not work without full support of the board and executive management.
Is The Risk Management Process Effective?
Many are the companies that have embarked on the ERM-journey and lost faith. In a recent study only 10% of 1450 interviewed companies claim that ERM provides considerable value. What’s wrong?