Capturing the Full Value of Risk Management

March 2009 Issue

By Diana Del Bel Belluz, M.A.Sc., P.Eng.

Last November I had the honour of facilitating the Risk and Insurance Management Society’s Enterprise Risk Management Summit. At the event, one of this E-Zine’s subscribers, Carol Fox, Senior Director of Risk Management and Business Continuity Planning at Convergys Corporation shared a profound, succinct statement on the value of risk management.To get the full impact, read it aloud:

Unmanaged risk is the greatest source of waste in your business and in our economy as a whole. Major projects fail; customer shifts make our offers irrelevant; billion-dollar brands erode, then collapse; entire industries stop making money; technology shifts or unique competitors kill dozens of companies in one stroke; companies stagnate needlessly. When these risk events happen, thousands of jobs get lost, brilliant organizations are disassembled, expertise gets lost, and assets are destroyed. Yet all of these risks can be understood, identified, anticipated, mitigated, or reversed, thereby averting hundreds of billions of dollars in unnecessary losses.”

Excerpt from The Upside by Adrian J. Slywotzky

If you are responsible for risk management, you have certainly been asked by others within your organization, by your colleagues, and even by your friends and family – Why bother with risk management?

The most frequent answer is that risk management serves to protect value by preventing catastrophic events and losses.

Indeed, value protection is the main objective of a range of regulations aimed at improving oversight and management of risk. Examples include the UK’s Cadbury and Turnbull reports, the U.S. Sarbanes-Oxley Act and Canada’s Federal Accountability Act. The majority of these regulations were introduced in reaction to crises brought on by failures of management and governance that produced spectacular losses, both financially and in terms of public confidence in corporations and in regulators, e.g., Enron and WorldCom.

The main drawback of a regulatory approach is that it creates a mindset of minimum compliance instead of maximum performance. Although it is useful in encouraging organizations to put in place structures and processes for risk management, the regulatory approach cannot compel nor inspire a risk management culture.

To thrive, an organization has to do much more than comply with regulations and avoid catastrophes. It has to convince its customers, owners and stakeholders that it has the potential to deliver value andit has to equip and motivate its people to actually deliver on that value promise.

Which brings us to the other common reason for pursuing risk management - it creates value by enabling the organization to live up to its performance potential. Risk Management improves performance in two ways. Firstly, proactive and systematic risk management helps you to eliminate the greatest source of waste in your business, which Slywotzky correctly identifies as unmanaged risk. Secondly, a balanced risk management culture will encourage people to recognize and take advantage of good opportunities.

Jim Carroll, a leading international futurist, trends and innovation expert, observes that “far too many organizations subsist in a stunning state of complacency as the world evolves around them at a very rapid pace.” He advocates that “rapid times require bold change; action is critical”. In tumultuous times it’s not enough to merely protect what you have. You also need to innovate which means you need to constantly seek out new opportunities. (See this month’s Bonus Resourceto learn how to cultivate an opportunity mindset.)

Market forces are beginning to align with this performance mindset. For example, in May 2008, Standard & Poor’s announced that it would enhance its ratings of nonfinancial companies through an Enterprise Risk Management (ERM) review.

Standard & Poor’s stated that “ERM will add an additional dimension to our analysis of management and corporate governance, creating a more systematic framework for an inherently subjective topic. Ultimately, we will enhance transparency by providing investors and issuers our views of a management team's ability to understand, articulate, and successfully manage risk.”

The fact that the expectations for effective risk management continue to grow and evolve means that the value of the risk discipline is not in question. Risk management is here to stay. Yet, despite the clear expectation to integrate it systematically into business practices, to date, few organizations have implemented risk management in a comprehensive way AND been able to sustain it.

Thus, the relevant question needs to shift from ‘Why bother with risk management?’ to ‘How can we use the risk discipline to improve performance?

Is your risk management program exclusively focused on identifying, preventing and preparing for losses and crises? If so, you are most certainly missing out on the full value of risk management. Also, you risk boring or alienating the vast majority of people in your organization who go to work every day to do great things (not to avoid bad things).

The good news is risk management can help your organization to create value by eliminating waste and finding opportunities. When people see how risk management improves performance, they will want to replicate that success. And success will encourage people to adopt risk thinking into their business practices in a way that regulation never could.

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The Risk Wise bottom line…

Improved performance can inspire effective risk management in a way that regulatory compliance alone cannot. To fully capture the benefit of risk management, you need to both eliminate the waste caused by unmanaged risk and enable your people to take full advantage of opportunities and innovate.

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Don’t be a victim of complacency or mediocre performance; to explore how your organization can become the leader in your sector, contact Diana Del Bel Belluz at Risk Wise: (416) 214.7598 This email address is being protected from spambots. You need JavaScript enabled to view it.

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Diana's Pick

Neuroscience and the Nonprofit Manager (written by Andy  Segedin and published in the NonProfit Times) shares some of the tips on how to counteract common biases and habits that impede effective decisions.

The article is based on a workshop that Diana Del Bel Belluz of Risk Wise presented at the 2015 Risk Summit organized by the Nonprofit Risk Management Center.