Tag Archives: strategic risk management

Creating a Strong Defense and Offense in Your Risk Management Program

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Stakeholders demand that companies grow, but at the same time, they expect growth to be managed to make sure the brand is not tarnished. That means enabling value as well as protecting value, which comes down to striking the appropriate balance between risk agility and risk resiliency.

For many years, risk management has focused on protecting the brand and keeping the company out of trouble. But if it’s done right, risk management is about playing not only defense but offense as well—it’s about value protection and value enablement.

Defensive Risk Management

Defensive risk management is mostly about risk resiliency, enabling a company to either prevent bad things from happening or recover more efficiently from disruption. Defensive tactics include setting up a risk appetite statement and framework that are approved by the board on down. Next, the risks should be aggregated across the enterprise and mapped against that appetite along with related risk tolerances and limits. Defensive risk management is also about developing a set of very specific key risk indicators (KRIs) to look for. This includes having a solid business continuity management strategy that will quickly get things back on track after a risk event. These activities keep the company out of harm’s way, and may be the easier part of risk management.

Offensive Risk Management

The more difficult part is thinking about risk management offensively—leveraging it for strategic advantage and growth. The first offensive tactic is to align your risk management process with strategic planning so you can drive those priorities forward in light of all the risks you are facing. That’s not an easy thing to do because even though companies may think they’re aligned, many of them actually run two very distinct and separate processes. Another offensive tactic involves giving some of the risk management activities back to the business units—so they can run faster and drive risk-adjusted decisions and revenue plans.

Risk agility lets a company flex and grow by making the risk management process adaptable to changes in the business model or to external changes affecting the company.

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It is also something that has to be thought about more formally so that it does not become counterintuitive to the growth agenda, but actually supports it and even helps drive it.

If a company is being held accountable by its stakeholders to grow—and they all are—that growth has to be pursued in a controlled manner so the brand doesn’t become tarnished. That is about striking the appropriate balance between risk agility and risk resiliency—playing offense and defense.

The simple fact is that companies that use their risk management activities to play both sides are more likely to see sustainable growth and better performance patterns because they are balanced between moving the business forward and keeping the business in check.

PwC’s study 2016 Risk in review: Going the distance highlights how companies can achieve this important balance. For example, companies that structure their risk management programs to play both offense and defense are more likely to see sustainable growth and better performance patterns.

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In addition, these companies are nearly as likely to report that they expect significant revenue and profit margin growth (greater than 5%) as companies that are focused only on growth—and they are better positioned for sustainable success. Such companies are balanced between having the agility to move their business forward and the resilience to prevent bad things from happening and/or recover more efficiently from disruption.

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High-risk growth

Some companies with aggressive top-line growth targets decide not to invest at the appropriate levels in their risk management programs, which can allow their growth to outpace their infrastructure. Following this course can bring more risks—vulnerability peaks and risk events become more crippling to the brand. In the end, more capital is spent on investments to take risk management activities to the next level after something bad happens to the business.

The mindset across industries is that immediate growth is great, but longer term, sustainable growth is better. Companies are building up stronger and more relevant second-line (risk and compliance) functions, and holding the first line more accountable on risk because they see that will help them achieve sustainable growth.
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Adapt or get left behind

As the business landscape continues to evolve, companies need to adapt or find themselves in deep distress. The key to creating an effective risk management program is to find the right balance that allows for growth at a comfortable pace relative to the risk appetite and risk tolerance levels set by management, and accepted by the board. When that is done, your risk management program truly becomes a strategic asset, supporting both offense and defense.

Company Growth and Compliance Challenge Risk Managers

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Risk management is maturing and is playing a larger role in insurance companies, both strategically and with their compliance objectives.

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As a result, the key task for chief risk officers is to help their company achieve balance between upstream and downstream activities, according to Accenture’s 2015 Global Risk Management Study of risk management in the insurance sector.

“Neither an unfettered approach to growth, nor an excessive focus on compliance, will deliver the desired outcomes.

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Instead, the risk function should steer a course between an informed, connected risk agenda, and the need for a sustainable and innovative strategic business direction,” the survey found.

While organizations mostly agree that risk management has helped their long-term business growth (85%), a large number believe that silos of business functions are hindering the effectiveness of their risk management programs.

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According to the report, because of the continuing low interest rate environment, which creates pressure on margins and returns, insurers are looking into other areas for growth, making it “increasingly urgent for the risk function to become more engaged in the evolution and reinvention of the business in order to anticipate and steer clear of competitive threats.”

To do this, respondents to the study are:

  • Working to understand what the new environment implies for both the risk management function and the business – and whether CROs and their teams currently have what they need to meet the requirements
  • Seeking to identify areas where there is a gap to be closed, with priorities that include:
    • Getting to grips with digital
    • Strengthening data and analytics capabilities
    • Developing operational risk management in a more systematic way to turn it into an enabler of sustainable, profitable growth
    • Ramping up the focus on recruitment and retention
    • Building a more consistent risk culture at all corporate levels.

The study also found that digital is playing an important role in growth:

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Risk Managers’ Role in Addressing Climate Change

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QUEBEC CITY, CANADA—Salutations de la ville de Québec! At the first day of this year’s RIMS Canada Conference, climate change quickly emerged as one of the key challenges facing risk managers—and an area with tremendous potential for risk professionals to effect change.

Government clearly has a role to play, but the slower pace and greater number of obstacles they face lessen some of the possible impact. According to Tim East, director of risk management at the Walt Disney Company, that is where businesses come in. Every one of the Dow 30 companies has created environmental and sustainability initiatives, but only 12% of companies have a C-suite or other top-level executive charged with leading action on this front. The clear trend of embracing corporate responsibility stems from a moral obligation businesses all have, and corporations must take initiative in changing how people think, East said.

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Addressing sustainability and other climate change concerns cannot be done in a silo, and efforts must focus on building resilience in all of the assets a business has: facilities, systems and people.

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Risk managers should be taking a leadership role, using their perspective of corporate objectives and performance to help identify and execute the most impactful change.

Risk professionals can particularly help drive this objective to boost awareness within the organization and in the broader community, while also ensuring the business itself is performing in line with sustainability goals. “Risk managers can help become part of the solution by helping to close the gap between the desires and intentions of our organizations and the performance and impact they have,” East said. “This is part of our moral obligation to reduce our impact on the environment.”

Why should companies act? “Not just because it’s good business—although it is, and not just because it’s profitable—although I think it is, but because it’s the right thing to do in the world and for the communities they serve,” East said.

To maximize the impact of these initiatives, East urges risk managers to set and pursue to reduction targets, otherwise they stand little chance of truly achieving change.

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Then, he advises they commit to a process of assessing, identifying opportunities, and measuring impact annually.

On the organizational level, changing mindsets extends beyond having employees recycle or monitoring water use. Business continuity planning is a critical task at Disney, East said, and they were always good at crisis management, addressing urgent problems over the course of a couple of days. Now, however, they are devoting more focus to planning for longer events.

To that end, the company is working to delink events from their consequences—rather than focusing on discrete emergency situations, it is focusing on how the business will be impacted by the conditions that could stem from any of these specific scenarios, he explained.

Getting started and shifting to a long-term focus seem daunting, and the slow rate of observable change often means adaptation and mitigation are not top of mind for businesses, said Lou Gritzo, vice president of research at FM Global. But risk professionals cannot wait for the next disaster or policy change to prompt a more serious evaluation of exposure and strategy.

Getting started on—or further investing in—mitigation efforts may be best focused on one of the main changes we are already seeing: flooding. Existing data shows a clear increase in flooding, and due to sea level risk and increased rainfall and intensity of rainfall, there will only be more, Gritzo said. To manage this growing risk, he recommends risk managers take four key steps:

  1. Know your flood exposure
  2. Be above the water level, and ensure any new construction is as far above it as possible
  3. Have and exercise a plan for flood emergencies
  4. Keep water out – in the wake of Hurricane Sandy, a number of physical protection measures have been certified and made commercial available to guard against up to a meter of water

Gauging the Impact of Reputational Risk

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The following article is part of a continuing blog series that will explore ideas, concepts, discussions, arguments and applications associated with the field of enterprise and strategic risk management.

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In my previous article, I made the point that the public discussion of reputational risk lacks a set of common standards or definitions. This lack of consistency allows organizations to interpret or define the concept of reputational risk in very different ways. For some, reputation is beginning to be viewed as something like the “risk of risks” in the same way people are starting to discuss the concept of the “internet of things.” I questioned whether reputation or brand is actually a risk or a residual event stemming from other extenuating risk domains or actions.

Upon further reflection and discussions with academics and risk professionals who are thinking carefully about this issue, I would go further now to suggest that reputation or brand risk involves perceived or real human behaviors that are, to some extent, measured against societal, economic or moral standards. The adherence or deviation from established standards generates the basis for the risk, and the variability from the standard influences the duration of the outcome.

The bigger question is: What impact does reputational risk have on economic performance when possibly mitigated by the existence of a robust enterprise or strategic risk management methodology? Is the data available to see the “correlates” between a reputational risk event that trigger or influence operational key process indicators like EBIT, ROA, ROE and share price (public or private)?

What we do know from the Aon 2015 Global Risk Management Survey is that business leaders are concerned about reputational risk in general and the possible linkages with other hazard and operational risks within their organizations.

The respondents to the survey said that they worried that a reputational risk event would significantly impact financial performance.

reprisk1If reputation/brand risk was identified as a precipitating event, the respondents identified regulatory change, increasing competition, talent retention, cash flow/liquidity and share price volatility as “follow on” risk consequences. In effect, reputation/brand risk might constitute a “gateway” risk, where other related “follow on” risk consequences are triggered and serve to increase the overall volatility/impact of the reputation event.

Another way to view the data is to see what events could trigger a reputation event.

reprisk2In this case, the survey respondents identified nine non-correlated risks that could precipitate a reputation/brand event. Here social media plays an important role.

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The speed by which information, accurate or not, is transmitted, consumed and iterated across the nine risk categories may have a material impact on the basis and duration of the reputation/brand event. There is also an error component associated with social media.

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How many times have we witnessed an initial media report of a brand damaging event that turns out to be prematurely reported and the facts distorted, only to be corrected in a later reporting cycle?

Next up: Fat vs. thin tail distributions.