Breaking Strategic Risk Management Barriers

This post first appeared on Risk Management Magazine. Read the original article.

strategic risk management

A recent survey of 152 CFOs at companies with $25 million or more in annual revenue found a critical gap between those who recognize the importance of strategic risk management and those who actually enjoy its advantages. Conducted on behalf of Liberty Mutual Insurance, the survey found that 68% of CFOs at mid-size and large companies appreciate the key role strategic risk management plays in driving business performance, but 41% said they are not able to reap its full benefits.

Survey respondents identified six key obstacles:

Corporate culture. While creating a risk-taking culture should start at the top, 31% of respondents reported that senior leadership did not buy in to strategic risk-taking.

Competing business priorities. Almost two out of five respondents reported their company placed a higher priority on other business initiatives than strategic risk-taking.

Failure to analyze risk. Understanding best- and worst-case scenarios gives leadership the confidence to take strategic risks, but only 48% of respondents reported regularly developing such analysis.

Underutilizing insurance programs. While 68% of respondents reported insurance played a key role in reducing earnings volatility and boosting company value, only 42% of companies reported using insurance programs to manage the majority of their organizational risk.

Rapidly changing landscapes. From new technology to macroeconomics, 34% of participating leadership reported that keeping abreast of new trends was a considerable challenge, sometimes forcing them to reactively recognize and manage emerging risks.

Lack of clear risk management responsibility. Only 56% of respondents said their companies had a designated risk manager responsible for identifying, prioritizing, managing and mitigating the exposures their organization faces.

Survey results also pointed to four important ways risk managers may be able to break through these barriers to strategically manage risk.

First, build a risk-aware culture that encourages smart risk-taking. Clearly, the two leading obstacles—risk awareness not being emphasized as part of the corporate culture, and a higher priority being placed on other business initiatives—are co-dependent. If your corporate culture does not support risk-taking, then risk-taking is likely to consistently be a lower priority, and vice-versa.

Overcoming these requires risk managers to help transform the company culture to one that focuses on decisions that create sustainable and profitable growth, rather than simply protecting against downside loss and operational risk. To help build such a culture, risk managers should:

  • Work with the CFO to gain the support of other C-suite peers and the board.
  • Demonstrate the value of viewing a company’s risks holistically and managing them with a dedicated team following a consistent approach across the organization.
  • Encourage collaboration across the organization—including legal, information technology, human resources and operations teams—to identify, quantify, prioritize, mitigate and manage the exposures that come with strategic decisions.

The second way to break through the barriers is to encourage forward-thinking risk analysis. Proper due diligence drives strategic risk management. Taking such risk is easier when you have identified the full range of possible outcomes, how each might impact the organization, and ways to minimize potential downsides. Only then is it possible to develop a cost-benefit analysis that helps senior leaders effectively make strategic risk decisions.

Remarkably, only 48% of survey participants regularly identify the best- and worst-case potential outcomes of strategic decisions. Failing to integrate outcome analysis and risk management dooms a company to identifying risks only after they have negatively impacted its operation, bottom-line and brand. This forces the company to operate defensively, rather than strategically.

While this integration is best done collaboratively to gain buy-in across an organization and at all levels of a company, it must start at the top. The C-suite must set an expectation that all areas of the company consistently follow such a risk vs. reward approach and cooperate on strategic decision-making.

Third, risk managers need to stay current. Change is more inevitable—and the rate of that change faster—than at any other time in our economic history. The introduction and adoption of technology-based products and services has sped exponentially, such as 3D printing in manufacturing, drones flying on construction sites, and health care companies calling ride-share companies for patients.

However, with new technology come potential exposures that must be fully appreciated and mitigated to be strategically managed by the company using them. Risk managers should understand the intersection between emerging technologies and a company’s operations to help strategically manage risk.

The fourth way to break through the barriers to strategic risk management is to leverage insurance. For 56% of respondents, their insurance program generated a far-reaching return-on-investment by helping the company achieve its overall business goals. According to participants, the top areas where insurance helps mitigate and manage risk are: employee safety (87%), cybersecurity and data breaches (78%), third-party lawsuits (77%), and regulatory compliance (63%). Yet only 42% of respondents reported using insurance to mitigate most of their overall risk.

While CFOs value the role strategic risk management plays in helping a company succeed, they report their organizations can do a better job in this critical area. By aligning risk management with overall company business strategy, risk managers have a tremendous opportunity to help close this gap and develop the type of strategic decision-making capabilities needed to drive companies forward.

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