Posted by: kenwbudd | January 6, 2011

Risk Management in Tough Times

Risk management and governance policies and structures are being provided increasing authority, visibility and independence. However, this is within a planned increases in investment and spending that is more than modest and may even experience shrinkage.

The reality is that the natural tension and conflict between the risk functions and the business’ aspirations for higher profit growth still exists. The real conflict is in how some balance and compromise can be achieved?

Key findings in the current environments, are:

* Strategic risk management is currently in an embryonic stage of maturity. Executives view the identification of new and emerging risks as a key objective of risk management, but roughly two-thirds of them believe their organisation is weak at anticipating and measuring future risks.
* Few organisations truly involve risk functions in key business decisions. Few companies expect risk functions to participate in strategic decision making in the near future. It tends to be a garnish on the side.
* Risk management needs to shift its role and emphasis from preventative activities towards a more proactive and supportive one. Risk managers need to expand far beyond providing supervisory, policing controls and monitoring to also include identifying opportunities to achieve and enable business objectives.

Window of Opportunity

Will increasing interest in including the risk function in strategy formulation simply a passing trend or temporary phase?

Hopefully, the interest will be permanent, but not without difficulties, and there are real obstacles.
1) Business line managers may continue to view the risk function as inertia and a brake on their ‘innovative’ activities, slowing sales and profit growth.

2) Technical knowledge and experience by boards of directors and executives is simply not adequate to fully understand how to integrate risk and performance management into strategic growth.

On a positive note, risk management is gaining influence and using more structured modeling and analytics software. Some better informed managers are creating a richer organisational culture for metrics and risk awareness that considers opportunities, not just threats.

Invulnerable Today, Rudderless Tomorrow

Half of the 25 companies that passed the rigorous tests listed in the once-famous book by Tom Peters and Robert Waterman, “In Search of Excellence,” today either no longer exist, or are in bankruptcy.

What happened? Well, when an organisation and it’s executives start to achieve results or becomes successful, they become more stability orientated and adverse to risk taking. Forgetting that maintaining their risk appetite /profile and taking calculated risks, is essential for organisations to change and continue be innovative.

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