Risk Management
Five common themes emerge across the board that provide insights into this gap. Firstly, risk management is hampered by a defensive and compliance focussed mindset which aims at ‘keeping out of trouble’. Consequently
efforts are being
disproportionately expended on meeting corporate governance requirements rather than focussing on those risks that truly matter, and make or break business performance.
Then, there is inadequate focus on risks by boards and executive management. This is predominantly because the risk agenda tends to be separated from the performance agenda and the strategic priorities of the business. What we see is symptoms of “doing things right” at the expense of “doing the right thing”.
Also, managerial decision making processes, whether that is strategic planning, capital allocation, or investment appraisals, all tend to operate in a relative vacuum of risk management. Each of these decision making processes involve making choices and assumptions, which are inherently underpinned by risks and uncertainties. However, there is insufficient dialogue, consideration and debate on these leading to a disconnect between outcomes and strategic decision making undermines the development of effective strategic risk management capabilities
What we also witness in the market is that a strong functional focus on risk management has resulted in the dilution and delegation of the ownership and accountability for managing risks to these functions. Risk management, however, is first and foremost a management’s accountability and the various risk functions are meant to act as enablers to help management discharge this accountability in an effective manner.
Finally the proliferation of risk management functions, operating as silos, breeds inefficiency on account of gaps and overlaps, leading to inappropriate focus on risks that matter and cost inefficiencies. According to our research 73% of companies have seven or more separate risk functions.
Risk Management as an Organisational Capability - Turning Risk into Results At Ernst & Young we recently conducted a study which found that companies in the top 20% of risk management maturity delivered 3 times the level of EBITDA than the bottom 20%. While we found specific risk practices that were consistently present in the top performers, what
Across those top scoring organisations risk management has a clear focus on value. Its design is based on a clear understanding of how value is defined and measured, how it is intended to be delivered, and what capability is needed to realise it. Their risk management function is always better informed financially, more evidence based and rigorous.
All these organisations have a risk strategy in place that is clearly articulated and communicated by the Board. This covers risk capacity (the levels of risk the organisation can take), risk appetite (the levels of risk the organisations is willing take), and risk ownership (those risk areas where the organisation has a natural competitive advantage and hence a source of opportunity to be exploited).
In addition, ownership and accountability for risk management is firmly established and accepted as belonging to line management with the risk management functions existing to support, equip and enable management to effectively discharge this accountability.
Other common features across these top performers include risk management processes, structures and functions that are optimised to balance value, cost and risk, through elimination of silos, aligned mandates and scopes, and consistent methods and practices.
We have also witnessed an emphasis on the role of risk management as the common thread running through decision making in the organisation at all levels. A clear tone set by the leadership and role modelled in practice, engagement and communication on the importance of risk management with employees at all levels, and encouragement through rewards and consequences, trust and sanction.
Organisations across different industries demonstrate these capabilities in different ways. Companies in the Oil & Gas sector for example are using risk management capabilities to drive investment in various onshore and offshore projects. Companies active in Life Sciences are seeking investment opportunities that enable them to take advantage of the paradigm shift within their sector towards health outcomes.
makes them stand out is that they had made risk management a core capability that enabled them to respond to risks and uncertainties in order to maximise opportunities to improve their performance.
Power& Utilities companies, on the other hand, are operating, maintaining and investing in improving their infrastructure; Technology and Media companies are looking to exploit the digital revolution. Each of them view risk management as core to their business and a key source of competitive advantage.
The way forward A risk management renaissance is underway and gathering pace. In an evolving business landscape managing risk is up there for any high performing business together with its people, processes and technology being used. Embedding risk management as the fourth dimension of business has the potential to fundamentally transform how organisations connect risk and reward.
Every business owes to have an internal dialogue about the nature and the volume of risk it takes, but also on the steps it takes to manage that risk. An open and honest conversation that includes employees and stakeholders is the only way for a business to evolve, achieve its objectives and realise its strategy that in a risk heavy operating environment.
Alison Kay is a Senior Partner at Ernst & Young. She is the Head of its Risk business and also the leader of Ernst & Young's sectors team. Alison has over 15 years experience in professional services advising clients at board and senior executive levels, across the Energy, Utilities, Telecoms and Government sectors. She specialises in helping clients deliver sustainable performance improvement through optimising their risk management capabilities, realising operational efficiency and achieving excellence in the delivery of large scale programmes.
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