Here’s Why Risk Is Something Your Business Should Embrace
Growing businesses succeed not by eliminating risk, but by understanding and managing it intelligently.
The following contribution is from Inc.com, the most prestigious SMB website in the United States, covering topics such as leadership, HR, business growth, NTs, and more.
The author is BRUCE ECKFELDT, CEO OF INC. 5000 AND STRATEGIC BUSINESS COACH. An architect by training, Bruce spent many years in digital product design and strategy before founding his Lean/Agile technology consultancy in 2003. He was named to the Inc. 5000 list for five consecutive years and ranked #241 in 2009. In 2014, Bruce founded Eckfeldt & Associates, where he works with founders/CEOs and management teams of high-growth companies, developing strategies and building leadership capacity. He is a speaker, author, and certified strategic business coach in Scaling Up and 3HAG/Metronomics. He is also a partner and lead facilitator at Wilder Retreats, which offers leaders unique experiences in natural and outdoor settings.
Most executives I know treat risk as a necessary evil: something to be minimized, avoided, or grudgingly embraced when pursuing growth opportunities.
However, this defensive mindset overlooks the true opportunity that risk represents for strategic leaders. In my years of working with companies navigating complex market transitions, I’ve seen the best leadership teams completely turn this conventional thinking on its head.
They don’t just tolerate risk, but actively seek out situations where their superior risk management capabilities give them the freedom to make decisions that leave the competition stagnant.
The companies that scale most dramatically aren’t necessarily the most confident; they’re the ones that have learned to turn uncertainty into a strategic weapon.
- Risk as an Opportunity
Smart leaders recognize that, in high-growth markets, risk represents both an opportunity and a threat.
While competitors hesitate or avoid uncertainty, companies with superior risk intelligence can boldly enter spaces others can’t or won’t enter.
The goal isn’t to eliminate risk, but to leverage it strategically: calculated risk-taking in areas of strength creates sustainable differentiation, while systematic risk management protects against threats that could stunt growth. This strategic approach requires a fundamental shift in how leadership teams approach uncertainty.
How We Manage Rather Than How We Avoid
Instead of asking «How do we avoid this risk?» the more appropriate question is «How do we manage this risk so effectively that it becomes a competitive advantage?»
Companies that master this mindset often find that their greatest growth opportunities lie precisely in the areas where competitors fear to venture.
- Apply a Systematic Risk Assessment
Effective risk management begins with thorough risk identification, rather than reactive responses to problems as they arise.
Most leadership teams address risks only when they become apparent, missing opportunities for proactive management and strategic leverage.
Implement a three-step risk assessment process for all strategic initiatives that go beyond traditional risk management approaches.
First, brainstorm and identify all potential risks that could impact execution.
Engage diverse perspectives to capture risks across market, operational, strategic, and financial dimensions. Go beyond the obvious risks to identify secondary effects and interconnected vulnerabilities.
Second, each identified risk should be assessed based on its likelihood of occurrence and potential impact on strategic objectives; a clear prioritization framework should then be created.
Consider the potential severity of each risk and how it might impact key stakeholders, resources, and timelines.
Third, for each significant risk, decide whether it should be avoided through alternative strategies and approaches or mitigated through specific plans that reduce its impact, such as insurance policies, contingency funds, or operational isolation strategies.
- Identify Strategic Risk Opportunities
The most sophisticated leadership teams go beyond risk mitigation to identify strategic opportunities where their risk management capabilities generate competitive advantages.
Rather than viewing all risks as threats to be avoided, they actively seek areas where superior risk intelligence enables bold strategic moves that competitors can’t or won’t attempt.
Develop a «Strategic Risk Map» that identifies risks your organization manages significantly better than competitors, and then design strategies that leverage these capabilities.
If your team excels at technology implementation risk management, you could implement digital transformation strategies that competitors avoid due to technical uncertainty.
If your financial risk management includes sophisticated scenario planning and stress testing, you could pursue aggressive expansion during economic uncertainty when competitors may shrink due to capital constraints.
If your operational risk management allows for rapid scaling without quality degradation, you could implement market share strategies that outperform competitors who can’t match your execution speed.
Create explicit documentation of your risk management strengths through systematic analysis.
Examine what types of uncertainty your team manages well, what risk categories it has successfully managed in the past, and where these capabilities could enable strategic moves that create market differentiation.
Look for patterns in your historical risk management successes: Do you excel at managing human, technological, market, or financial risks?
- Integrate risk intelligence into decision-making.
Risk management becomes effective when it is integrated into routine strategic decision-making processes, rather than treated as a standalone analytical exercise.
High-performing teams integrate risk analysis into their standard processes and frameworks, ensuring that risk intelligence enhances strategic agility rather than hinders it. Create «Risk-Based Decision Protocols» that require an explicit risk assessment for all strategic decisions that exceed defined thresholds, but structure these protocols to accelerate rather than slow decision-making.
Before approving new initiatives, strategic alliances, or significant resource commitments, teams should identify the main risks, assess their likelihood and impact, and define specific mitigation strategies.
However, the goal is not an exhaustive risk analysis, but rather rapid risk intelligence that enables confident action.
Establish standard risk questions for strategic discussions:
– What could go wrong with this approach?
– What early warning signs will indicate problems?
– What contingency plans do we have if the main strategies fail?
– What risks are we accepting and why?
Maintain a «Strategic Risk Dashboard» that monitors key risk indicators alongside traditional performance metrics, ensuring that risk information remains visible and actionable throughout implementation.
Strategic risk management is not about eliminating uncertainty, but rather about developing organizational capabilities that transform it into competitive advantage.
By systematically assessing risks, identifying strategic opportunities to exploit them, and integrating risk information into strategic decision-making, leadership teams can act more boldly and strategically than competitors, who see risk only as a threat to be managed.
Discussion Questions:
– What systematic blind spots might exist in our current approach to risk identification?
– Which of our risk management capabilities could become sources of competitive advantage?
– How effectively do we integrate risk assessment into our routine strategic decision-making processes?
From Threat to Opportunity
PwC’s 2023 Global Risks Survey
How a Technological Inflection Point Is Driving Reinvention, Resilience, and Growth
If we don’t take risks, we don’t progress.
Intelligent risk-taking is the only way organizations can reinvent and transform to survive, create value, and thrive in these uncertain times, while building resilience to protect value in the face of complex and ever-changing risk.
A Shift in Perspective
PwC’s 2023 Global Risks Survey reveals how leading organizations are shifting their perspective on risk by embracing the transformative power of technology and data to unlock opportunities and create value.
The study, which surveyed 3,910 business and risk leaders, from the board of directors to senior management, across technology, operations, finance, and risk and audit, also highlights how technology is playing an increasingly important role in helping organizations protect value by more effectively mitigating and managing downside risk.
The era of the benign risk environment is over for the foreseeable future, amplified by the increasing pace and impact of technological change.
These threats mean that intelligent risk-taking, driven by technology and framed by growth and opportunity, is now crucial to adapting and reinventing in this ever-changing world, both to protect and create value.
The transition to new energy sources is seen as the greatest opportunity among external disruptors, cited by 54% of respondents, closely followed by changes in customer demand and preferences (47%). In contrast, supply chain disruption is the top external factor perceived more as a risk than an opportunity, cited by 42% of respondents.
Industry sector also influences whether organizations fall at the extreme end of the risk tolerance scale, either protecting or creating value.
Those in higher-growth industries, such as retail and technology, are more likely to take risks and seek opportunities, while those in regulated industries, such as government and pharmaceuticals, are more likely to prioritize regulatory compliance and focus on risk prevention.
Different functions within the organization also have different perspectives on risk, with finance roles more likely than others to say their organization focuses on risk prevention rather than a high risk tolerance.
Moving Forward in the Pursuit of Opportunities
Interestingly, our survey reveals that the top 5% of performing organizations, spread across all industry sectors—identified in the research as Risk Pioneers—are moving forward in the pursuit of opportunities. Backed by strategic enterprise-level resilience and guided by a human-centered, technology-driven approach, these Pioneers are significantly more likely than other organizations to empower their internal teams and make greater use of advanced analytics, predictive modeling, cybersecurity tools, and the cloud to manage risk.
Additionally, they are more likely to view emerging technologies like GenAI as an opportunity rather than a risk.
As a result, this leading group is better aligning risk management with business strategy to achieve a wider range of outcomes and value, from stronger regulatory compliance and optimized reporting to increased customer trust and the identification of new business opportunities.
Five Key Findings
Our survey highlights five compelling findings for leaders. This report explores each of these in more depth, focusing on why they are important to organizations and their stakeholders, the value they create, and practical ways to use technology and data in new ways to address risk.
How to Use Business Risk to Take Advantage of New Growth Opportunities
The following contribution is from the Reworq Consulting portal, founded in 2015. Reworq Consulting is a management and advisory firm for SMEs based in Sydney, New South Wales, Australia.
Reworq Consulting focuses on providing services to small and medium-sized enterprises (SMEs) and organizations with less conventional business models.
The author is John Field, CEO and founder of Reworq Consulting.
Business risk is an integral part of business growth, as it allows organizations to pursue new opportunities. The higher the risk, the greater the potential reward.
Organizations face a variety of business risks, both predictable and unforeseen, that can threaten their ability to achieve their goals and objectives.
If these risks are not properly monitored and managed, they can seriously impact strategic plans and potentially reduce profitability opportunities.
By identifying and managing risks, businesses can achieve a balance between risk and reward, as each business model faces its own unique circumstances, objectives, and risk tolerance.
Risk, regardless of its form, affects an organization’s financial objectives and can lead to business failure.
Business risk is unavoidable,
but understanding and consistently assessing the likelihood of potential risks is critical to managing your risk portfolio.
However, understanding the benefits and types of challenges to anticipate in Risk Management can help resolve potential problems, as effective risk control and management becomes possible.
What is Business Risk?
Business risk is a component of Risk Management that assesses, prioritizes, and addresses the risks inherent in any change to an organization’s operations, systems, and processes.
Business risk guides decision-making and planning, enabling an integrated response to multiple risks and facilitating informed, risk-based decision-making. Business risk represents a broad set of circumstances or events that can negatively impact an organization’s financial and operational activities.
Risk management helps actively prevent business risks, but it is almost impossible to completely mitigate them.
Hence, the crucial importance of an organization’s ability to identify risks and have a Risk Management Plan.
The Impact of Risk: Business Risk vs. Financial Risk
Similarly, business risk is identified from both internal activities and external forces that impact an organization’s operational areas.
The immediate focus of organizations should be to identify the risk, avoid it (if possible), reduce it to an acceptable level, transfer it to further reduce the impact or share it, and retain it when conceptually agreed upon and accepted.
It is important to examine risk in the context of existing systems and processes, thereby developing an effective Risk Management Plan to counteract it.
Risk can be defined in two (2) main categories: financial risk and business risk.
- Financial Risk
Financial risk is determined by leverage and occurs when an organization relies heavily on debt as a source of financing.
When an organization’s management team must request surplus funds, they must pay both the principal and interest to meet their debt obligations. Liquidity management becomes an important concern, especially when future risk arises.
By using debt in your capital structure, your company becomes susceptible to rising interest rates, inflation, and the obligation to comply with the terms of its various existing credit agreements (suppliers).
Financial risk represents an organization’s commitment to meeting its debt service obligations, as well as potential regulatory and credit reporting requirements; however, these factors can lead the company to default.
- Business Risk
Business risk is determined by internal and external factors that converge to create threats to an organization and its executive management team.
These threats to an organization’s operational objectives can arise from the following:
The external business environment, including macroeconomic forces beyond the control of executive management (e.g., inflation, interest rates, exchange rates).
Industry-specific risks, including the level of concentration in the sector, regulatory risk, market entry barriers, supply chain events, or the threat of disruption to operational activities.
Internal organizational issues, including ineffective executive or senior management, a toxic corporate culture that extends to the entire work environment, corporate reputational risk, and customer or supplier concentration risk.
Influence and Nature of Business Risk
Business risk is influenced by numerous factors, including the following four (4) principles:
- Risk arises due to uncertainty
Uncertainty is defined as the uncertainty about what will happen in the future.
Some common examples of uncertainty are: changes in customer demand, government policies, market conditions, technology, etc.
Business risk arises due to these uncertainties.
- Risk is an essential part of any business
Risk is an important characteristic of any business. No organization can avoid it, although its degree may vary. Risk can always be reduced, but it cannot be eliminated (completely).
- The degree of risk depends on the type of business and the industry.
The degree of risk depends on the type of business.
Similarly, an organization that operates as a large company naturally manages more risks than a small business or a small and medium-sized enterprise (SME).
- Profitability is the reward for managing business risk
Profitability is the reward for any organization that manages its risk.
Risk is not static.
The risk-reward relationship is designed to achieve the highest possible return on investment (ROI) while maintaining an acceptable level of risk.
What is the importance of “risk intelligence” in minimizing business risk?
Risk intelligence is much more than simply gathering information and is evident in the form of actionable intelligence.
For organizations, this methodology involves providing the right information to key stakeholders so they can make informed decisions in a timely manner or, even more importantly, in real time.
However, Business Intelligence (BI) enables organizations to use a technology-based process to analyze data, generate actionable insights, and use the analysis processes to continuously improve follow-up questions and iterate.
In today’s environment, modern risk intelligence is more than just a description of systems. As part of Risk Management in companies or corporate businesses, risk intelligence now refers to the practice of comprehensively integrating relevant Risk Management procedures throughout the organization, a holistic process known as Risk Intelligence Governance.
Why is decision-making key to your Risk Management strategy?
With a critical focus on your Risk Management strategy, decision-making is key to a risk-intelligent organization.
A comprehensive collection of risk intelligence helps you improve your ability to act and make strategic decisions aligned with your business goals and objectives.
In addition, it is necessary to encourage your employees to adopt the organizational vision and integrate it into the Risk Management strategy, thus ensuring that risk is identified in each function and throughout the organization.
To build a risk-intelligent organization, the steps to follow include:
– Establish a Risk Management Framework, a policy and processes to assess and manage risks.
– Identify key risks, as well as the Risk Management Plan needed to address them.
– Assess where risks could have a significant impact on organizational value and determine whether to proceed with the risk or mitigate its impact.
– Establish your risk tolerance and its alignment with your organization’s goals and objectives.
Decisions are based on key stakeholders, who have the authority to take organizational risks but recognize responsibility for incorrect decision-making.
Organizations need business leaders to manage the time to plan, be prepared for change, and the level of ambiguity that comes with it.
While many business leaders may believe that emerging and strategic risks have little or no influence on the actual functioning of their organization, it is impossible to remain completely indifferent to the exposure to risks that can impact business operations.
Stakeholder Collaboration
Your Risk Management strategy should involve collaboration between the Executive Management Team, senior management, and your organization’s key stakeholders.
This ensures that risks are mapped to business objectives and that the Risk Management process is aligned with your strategy and overall business vision—the key to building a truly Risk Intelligent organization.
How does empowered decision-making contribute to your understanding of Risk Management?
When Risk Management is executed based on inconsistent data intelligence, assumptions, or deregulated environments, the obsession with speed in decision-making can, of course, be detrimental to any organization.
Making irrational decisions based on conventional risk assumptions can lead to catastrophic circumstances.
Therefore, delaying strategic decisions isn’t always a bad scenario—it just makes sense!
This provides a critical buffer period for the Executive Management Team to take advantage of (and identify) significant changes in the business environment.
It also enables robust decision-making to determine whether to pursue a presented strategic opportunity or adjust the approach with a more defensive strategy.
To make urgent decisions with the speed required for relevance and, therefore, gain a competitive advantage, risk professionals must learn to make critical business decisions in real time.
This is why reliable Artificial Intelligence (AI) solutions are required: to review massive amounts of data in a fraction of the time required by manual processes and help provide meaningful risk insights.
Summary
Risk is the cost of doing business, and without risk, there is no reward.
Organizations that take calculated (but necessary) risks through a strategic approach maximize their chances of success and minimize the possibility of negative outcomes.
Risk Management is critical to the proper functioning of an organization and helps make better business decisions. However, every business decision carries risk, and addressing current (and present) industry challenges requires preparing for trends and potential future risks.
By implementing an effective Risk Management Program, organizations protect their competitive edge and reduce the number one consequence of poor Risk Management: the loss of business competitiveness.
Justifying a Risk Management Program
A difficult challenge for many organizations is to solidly justify the existence of a robust Risk Management Program that can answer a fundamental question: «How important should loss prevention be in the face of a potential disaster that might never occur?»
However, there is general consensus that the consequences of a failure in Risk Management can be catastrophic for business objectives.
It is critical for many organizations to develop a robust and consistent enterprise-wide Risk Management Program, as most prevalent business risks will remain at current levels or are likely to increase.
5 Risks for a Growing Business and how to Manage Them. Growth entails predictable risks.
The survival of your business depends on identifying and managing them.
The following contribution is from INC.com, the most prestigious SMB site in the United States.
The author is LEE COLAN, CO-FOUNDER OF THE L GROUP. Lee J. Colan, PhD, is a leadership advisor and consultant and the author of 14 best-selling books on leadership.
Business Risk Taking
Over the past 20 years, I have observed 10 recurring risks for growing businesses and helped clients address them.
Understanding how these risks apply to your business and proactively managing them will help you sustain growth.
These first five risks apply to growing businesses to varying degrees.
Generally, risk factors are more prevalent in young businesses with higher growth rates and less prevalent in mature businesses with lower growth rates.
#1: Gambling Against the Law
Companies tend to assume little risk in regulatory compliance for their operations due to agency oversight, customer demands, and ethical responsibility.
Growing companies often assume much greater risks in employee-related regulatory compliance, such as:
– Fair compensation and stock option practices
– Fair selection and promotion practices
– Wage and hour laws
While regulatory compliance in these employee-related areas also enjoys government oversight, it does not carry the same urgency as operational regulatory compliance. Therefore, employee-related regulatory compliance often falls by the wayside during periods of growth.
Risk Management #1
Prioritize areas with the greatest legal exposure and greatest resource demands.
Consider outsourcing, automating, or at least streamlining activities associated with these areas.
More and more companies are outsourcing areas requiring regulatory compliance to external government agencies (e.g., health benefits, savings plans, recruitment).
Outsourcing isn’t necessarily a cheaper option, but it does:
– Reduce liability
– Improve resource concentration on your core competencies (what you do best)
– Capture opportunities that would otherwise be missed.
#2: Underdeveloped operational infrastructure
This is the most common risk factor we see.
Most growing companies are so focused on their current production capacity that they devote little effort to building the operational infrastructure necessary to sustain their long-term growth.
We define infrastructure as «systems,» the second pillar of the organization. Systems include:
– Work procedures
– Communication channels
– Decision-making
– Information processing
– Planning
– Performance management
– Standards and policies
– Objectives and measures
– Rewards and recognition
– Staffing and selection
– Training and development.
Many senior executives mistakenly confuse «infrastructure» with «overhead.»
We’re referring to the operational infrastructure needed to market effectively, serve customers, generate revenue, and remain competitive.
Risk Management #2:
As a litmus test, think of your business as a franchise you’re selling.
To what extent have you built an operational infrastructure that transcends your employees and management team?
Streamline your manual work processes before modifying your technical systems.
Saying «We need a new IT system» is an easy excuse, but many companies simply automate their own inefficiencies.
Creating the right level of operational infrastructure will allow you to focus on your business instead of their business.
This will help you address a common frustration we hear from our clients’ CEOs.
Winston Churchill said, «For the first 25 years of my life I wanted freedom. For the next 25 years I wanted order. For the next 25 years I realized that order is freedom.»
Proper infrastructure will give you the freedom to focus on your business instead of their business.
#3: Decline in Product and Service Quality
This risk factor is generally a direct result of failing to manage Risk Factor #9.
It results from a prolonged lack of attention to operational infrastructure, but its negative impact on a business is immediate.
In short, customer needs are overshadowed by growth needs.
Risk Management #3:
Break the «growth for growth’s sake» paradigm.
Change your business model and your employees’ focus toward profitable growth.
Educate your employees on the importance of acquiring a new customer in order to sell more to an existing customer.
Refocus attention on your customers’ needs and the related processes to meet them.
It’s a true paradox that, with all the corporate propaganda about «The customer is king,» so many companies continue to lose sight of their customers.
#4: Inability to Capture Key Data
This risk factor results in inefficient data collection, slow decision-making, and poor performance management (from corporate results to individual output).
When companies fail to manage this risk factor, they rely on what we call «gut feeling management,» a worrying scenario when it comes to financial projections.
Risk Management #4:
Simplify Measurement.
Identify and focus on your company’s key success factors and corresponding metrics.
Remember: What gets measured, gets done. Then, integrate your systems (after streamlining your manual processes) to capture the data you need.
#5: Lack of Due Diligence
Most mergers and acquisitions fail to meet performance expectations, and this starts at the very beginning of the due diligence phase.
Risk Management #5:
Create a due diligence process (which can be summarized in checklists) and a team, and stick to it.
The team can be used as an effective development task, but ensure there is reasonable continuity within it.
Evaluate compatibility issues between people and culture; this is the main cause of what we call post-merger indigestion.
Lessons Learned from Rapid Growth
The following contribution is from Brady Ware’s advisory and accounting portal for today’s small and medium-sized businesses, offering solutions for tax and audit compliance, business performance, valuation, IRS disputes and litigation, and more.
Lessons Learned from Business Owners During Periods of Rapid Growth
Navigating rapid growth can be both exciting and overwhelming.
Business owners who have successfully weathered this storm often share common perspectives.
Here are some key insights, not only from our clients but also from business surveys.
While all of these areas also play an important role that greatly impacts a business’s long-term success, the first two tend to be the most relevant to business owners: culture and cash flow.
Here is the list of lessons learned, or key areas, that business owners most frequently mention.
Cash Flow Is Key
Cash Flow Management
Ultimately, maintaining a healthy cash flow to fund operations and investments is critical.
Effectively managing revenues and expenses, as well as planning planned investments in expansion, personnel, technology, or equipment, requires diligence and focus.
Financial Planning and Investment Strategy
Create detailed financial projections to anticipate needs and potential challenges and include them in your regular strategic and operational meetings.
Involve the right people and the right mix of legal and accounting consultants to help you evaluate your options and the outcomes of your decisions.
Culture and People
Culture
Having a strong culture and a genuine dedication to a positive workplace culture is an underrated aspect of a company’s success.
Often, a company’s product or service, the development of market opportunities, and innovation take center stage. However, without a strong culture with people committed to their beliefs and values, there will always be problems that affect growth and success.
Talent and Employee Development
Hire the right people with the skills and experience needed to drive growth, while investing in their development to retain top talent and foster a positive company culture.
Leadership
Develop strong leadership within your organization to guide and inspire your team, while ensuring your company’s hierarchy and organizational chart are appropriately focused on developing the next level of talent, regardless of their level.
In addition to these first two points, business owners also mention:
Scalability
Ensure your infrastructure can handle increased demands, from technology and facilities to human resources or company processes.
And maintain a constant focus on ensuring the smooth running of existing operations, while carefully monitoring new implementations to help address issues or simply improve.
«Rapid growth is a double-edged sword. While exhilarating, it also comes with significant challenges. By focusing on these key areas, companies can position themselves for long-term success.»
Customer Focus Is Paramount
Prioritize customer satisfaction to build customer loyalty and attract new customers, and ensure you act on their valuable feedback.
Actively seek customer feedback through surveys, one-on-one conversations, and proactive engagement through in-person or marketing communications.
From there, what areas of the customer experience can you improve? Even implementing one or two improvements a year contributes significantly to building a customer-centric culture.
Be Adaptable.
In an ever-changing world, be prepared to adapt to changing market conditions, customer preferences, talent and workforce, innovation, and, well, everything.
Look at how much has changed over the past 20 years, from work and employment to economic conditions, customer expectations, and more.
Even the U.S. tax code has undergone significant changes, from corporate tax rates to inheritance and gift taxation and pandemic-related changes.
In 2024, artificial intelligence (AI) burst into businesses as an unexpected tool, but with many unknowns. Innovation and adaptability are necessary in today’s business.
Trust
Trust has never been more crucial.
– Is your company culture one in which employees and leaders at all levels trust those above and below you to handle the tasks and responsibilities necessary to run your business?
– Do people feel empowered to make smart and thoughtful decisions?
– Is accountability part of your culture?
Guidance and Mentoring
As a business owner, you are often the one who advises, guides, and helps resolve any issues or problems.
But successful entrepreneurs are also smart enough to know they need their own group of peers to vent, discuss problems, or even just talk business.
Build a strong network of industry contacts for support and collaboration.
The True Impact of Business Complexity (with Tips for Creating Clarity)
The following contribution is from Lucid Software, a pioneer and leader in visual collaboration, dedicated to helping teams build the future. With its products—Lucidchart, Lucidspark, and Lucidscale—teams are supported from ideation to execution, empowering them to align around a shared vision, clarify complexity, and collaborate visually, no matter where they are located. Lucid is proud to serve leading enterprises around the world, including clients like Google, GE, and NBC Universal, and 99% of the Fortune 500. Lucid collaborates with industry leaders such as Google, Atlassian, and Microsoft. Since its founding, Lucid has received numerous awards for its products, business, and work culture.
Today’s businesses are more complex than ever, with an ever-increasing amount of tools and data to manage. At the same time, market conditions and work environments are evolving at an accelerated pace, making it imperative for businesses to react and make decisions quickly.
To successfully respond to change, organizations need a clear understanding of their processes, tools, and data, and how these integrate with each other.
Increased Pressure on Organizations
The combination of increased complexity and accelerated change is putting undeniable pressure on organizations. Those that clearly understand their business and the impact of their decisions will be better prepared to adapt to change than those overwhelmed by complexity.
In other words, to stay competitive, organizations need a way to clarify business complexity.
What is business complexity?
Business complexity refers to the formation of a large, interconnected network of technologies, data, products or services, and people within an organization.
It is often a consequence of positive business changes such as innovation, growth, and product portfolio expansion. Essentially, as companies incorporate new tools, support new customers, and scale their organizations, more and more interconnections and dependencies arise within the enterprise.
However, business complexity can, and often does, spiral out of control.
Generally, the larger the company, the more complex the business.
For some, the web of interconnected data, technology, and processes becomes so complex that it becomes difficult to determine how elements impact each other and which are necessary for the business.
What is causing the recent increase in business complexity?
Without a doubt, recent years have increased the level of complexity experienced by many organizations.
The COVID-19 pandemic acted as an accelerator of change: in a short period of time, organizations had to adapt their strategies to a new market, enable a remote workforce with new tools, and accelerate digital transformation efforts.
All of these changes involved adopting a large number of new processes, workflows, and tools in a relatively short timeframe.
A recent Okta customer study (Business at Work 2022 report) shows that the average number of applications that organizations deploy has increased by 24% since 2016.
For large organizations (those with more than 2,000 employees), this average rises to 187 applications.
The focus on digitalization remains a priority today, even despite concerns about less favorable economic conditions. According to SWZD’s 2023 State of IT report, 51% of companies still plan to increase their year-over-year IT spending in 2023 (compared to only 6% that plan to cut it).
Investing in new technologies is often necessary to accelerate key use cases and enable more advanced analytics, but there’s a catch: more tools mean more data silos.
As different teams across the business invest in different tools, it becomes incredibly difficult to connect the dots between them and understand how they fit together.
In fact, the biggest data governance challenge organizations face is the disparity of data sources and systems, according to a Ventana market report.
Essentially, data silos make it extremely difficult for organizations to ensure the availability, usability, cost-effectiveness, and security of their data.
This complexity is compounded by the layers of processes organizations implement as they grow.
The Impact of Business Complexity
Business complexity affects nearly every aspect of an organization. Some of the most significant areas of impact include:
Reduced collaboration, productivity, and innovation
As businesses become more complex, workers are inundated with more information than they can effectively understand.
According to a Pega study, 90% of workers indicated that managing information overload is one of the top factors contributing to complexity in their work.
The time it takes to find relevant information, determine what’s up-to-date, and prioritize actionable steps based on that information takes away significant time that could be spent on higher-value collaborative tasks, such as idea generation and discussing innovative solutions.
Recent data suggests that, on average, workers spend five hours per week searching for project-related information, which is equivalent to nearly a full workday.
Not to mention, trying to communicate complex concepts to stakeholders for buy-in can start to feel like a near-impossible task.
The same Pega study shows that managing internal processes and bureaucracy is the second-largest contributor to day-to-day complexity, often leaving teams misaligned and hindering progress toward goals.
Stalled Decision-Making and Growth
One of the biggest problems with complexity is that it significantly hinders data analysis and synthesis.
When data is siloed, teams only see a fragmented view of the organization, making it difficult to gain all the context needed to make confident decisions.
In fact, 86% of respondents to an HBR survey reported that decision-making and business processes had become so complex in their companies that they were inhibiting their ability to grow.
The irony is striking: complexity, which originally arose from growth, can become a major impediment to growth.
This complexity is costing organizations dearly. For managers at an average Fortune 500 company, time spent making decisions translates into more than 530,000 lost workdays and approximately $250 million in wasted labor costs annually (McKinsey).
Increased Security Risk
Data silos not only affect collaboration and decision-making, but also increase risk as important data is dispersed across tools.
A recent PwC study shows that 75% of executives are concerned about cyber and privacy risks stemming from excessive complexity in their organizations.
The more complex a business is, the more difficult it is for organizations to understand where data is located and adequately protect it.
Tips for Managing Business Complexity
Trying to simplify business complexity can feel like a precarious (and high-stakes) game of Jenga: Could removing one element cause the entire structure to collapse? Although it may seem like a daunting task, there are steps organizations can take to clarify and manage complexity and ultimately keep the business moving forward efficiently.
- Convert complexity into easy-to-understand formats, such as visuals.
To manage complexity, organizations must start by understanding it: what causes it, how does everything connect, and what are the most important components?
Visuals are one of the most effective ways to show the relationships between different objects and illustrate the various layers of a business.
Start by visualizing the current state of your processes, systems, and business architecture.
You may consider using a tool that automatically visualizes your technical systems through integrations to save time and ensure your visuals stay up-to-date.
With this understanding, you can see the impact of potential changes and easily identify opportunities to optimize the business.
- Consolidate tools and overcome technology silos
Consolidation should be a top priority for organizations that want to manage business complexity.
When evaluating new technologies to implement, prioritize comprehensive solutions that can integrate with, or even replace, your existing tools.
By reducing the number of independent tools, you will decrease the number of data silos across the organization.
With fewer data silos, teams will be able to manage security risks and make decisions more easily.
- Foster organizational agility to adapt to complexity
Complexity is a natural side effect of growth; as your business grows, you will experience complexity.
That’s why it’s important not only to take steps to clarify and reduce complexity, but also to adapt to it. This is where organizational agility comes in.
Focus on embedding an internal business agility capability into your company culture to ensure your organization is prepared to respond to internal and external changes, including emerging threats or opportunities.
- Create a single source of truth
Keeping teams across the organization aligned is critical to managing complexity.
To ensure everyone has the information needed to innovate and make decisions, look for ways to centralize information, including insights, past decisions, processes, systems, and more.
Most cloud repositories offer secure and accessible storage options and are especially useful for hybrid or dispersed teams. A single source of truth saves time and acts as a starting point for collaborative discussions and ideas, making innovation a more consistent and scalable activity. Additionally, as team members come and go, it ensures that work and knowledge stay within the company. Lucid’s Team Hubs feature is a great way to start. Create a foundation for your team by bringing together the resources needed to initiate work, coordinate progress, and stay aligned, all in one place. Clarify Complexity with Visual Collaboration
Business complexity is the inevitable result of growth.
As your business grows, it’s important to take steps to clarify complexity in order to increase efficiency, scale innovation, and reduce risk. Many organizations are taking the first step toward clarifying complexity by turning to visual collaboration solutions. Through visual collaboration, teams can work together to refine complex concepts, collaborate continuously, and capture the context they need to make decisions in one central location.
Business Risk Management: Analysis, Types, and Methods
The following contribution is from the ProfileTree Web Design and Digital Marketing portal, which was founded in 2011 and began as a modest team of just two dedicated people. Without a recognized reputation, we faced the significant challenge of making our mark, developing a unique brand identity, and establishing ourselves as a respected company in the competitive digital marketing industry.
Business risk management is essential for any business and a key factor in its success.
Market competition is at an all-time high.
Therefore, it is more crucial than ever to ensure a secure business plan that generates the highest possible profitability.
While all businesses face risks, some can predict and control them, while others cannot.
It is no secret that taking risks is a fundamental step toward success.
As the saying goes, «The willingness to take risks is the path to success.»
However, uncalculated risks can have detrimental consequences.
Therefore, to address these risks, it is necessary to understand what they are and how to manage them. Reading this article from beginning to end will help you understand enterprise risk management and its different types.
What is enterprise risk management?
Enterprise risk management is the process of identifying and assessing risks, as well as developing strategies to manage them.
The methods for measuring and assessing risks depend on the profession, industry, or business model.
What is a risk management plan?
A risk management plan and a business impact analysis are fundamental elements of a business strategy. Identifying and understanding potential risks to your business will help you recover in the event of an incident.
Developing a risk management plan is a common process.
However, the types of risks can vary depending on the type of business. Risk management plans provide detailed methods for addressing them.
Step-by-step risk identification process:
– Assemble a cross-functional team that covers different areas of the business.
– Lead a brainstorming session based on risk categories: strategic, operational, compliance, etc.
– Record all identified potential risks without an initial judgment of probability or severity.
– Distribute the risk survey company-wide to uncover threats that operational teams are detecting and that leaders might overlook.
– Incorporate relevant external data into statistical forecasting models to predict new risks.
Compile a comprehensive list of risks for further ranking.
Risk Analysis: Once risks are identified, analyses help determine where to prioritize based on potential impact and likelihood. Both qualitative and quantitative methods add value.
Qualitative Risk Analysis
Rate the probability and business impact estimates on a subjective scale of 1 to 5 for the identified risks.
Multiply the scores to obtain a weighted «risk score.»
Rank the risks from highest to lowest score. Prioritize those that pose the greatest threat.
Quantitative Risk Analysis
Develop statistical models with 3 to 5 years of internal data to forecast the likelihood of risks materializing, based on correlations between past losses and risk factors.
Calculate the potential cost impact based on the financial damage caused by historical incidents.
Use probabilistic Monte Carlo simulations for worst-case losses.
What is Enterprise Risk Management? According to the Atlantic International University publication, the concept of «enterprise risk management» was created by risk management professionals. Its purpose was to implement company-wide risk prevention and awareness programs.
Enterprise risk management seeks to control, identify, and assess risks, particularly through insurance.
Enterprise risk management focuses on establishing an enterprise-wide risk management system to manage risks associated with a constantly evolving business environment.
Typically, enterprise risk management includes the following elements:
– Including risk management in the company’s values.
– Backing those values with actions.
– Conducting a risk analysis.
– Implementing specific strategies to reduce risk.
– Developing monitoring systems to provide early warnings of potential risks.
– Conducting periodic program reviews.
Types of Enterprise Risk Management
We must study the different types of enterprise risks and their solutions to explain the concept and importance of enterprise risk management.
In addition, we must analyze enterprise risk management models and analysis.
Specifically, we will analyze the following types of risk:
– Strategic
– Compliance
– Operational
– Financial
– Reputational
– Political.
Risk Management Process Infographic
Strategic Risk
Strategic risk is a source of loss that can arise from failed business planning. Therefore, the company’s strategy becomes ineffective, and consequently, it struggles to achieve its objectives.
A strategic risk can result from changes in customer demand, fierce competition, or technological changes. Xerox became famous for the development of laser printing, which represented a strategic risk to its position. In fact, it managed to change its business model and adapt to the new technology.
The company survived the strategic risk, and as a result, laser printing became a multi-billion-dollar business. Therefore, if it weren’t for its clear understanding of enterprise risk management, it wouldn’t have sold.
Defining Business Strategy and Objectives: Companies use systems to execute their business plans. However, these systems sometimes fail to address or identify risks. Therefore, it is critical that these systems identify business risks during the planning process.
Build key performance indicators (KPIs) to measure results: Your business model can be greatly improved by using these KPIs. Therefore, total sales are not as valuable as sales per customer, which creates the need to find answers.
Identify risks that may affect performance.
Build Key Risk Indicators (KRIs) and Tolerance Levels for Critical Risks
KRIs are designed to anticipate potential obstacles. Tolerance levels, meanwhile, serve as triggers for action.
Monitoring and Reporting: Companies must consistently monitor results and KRIs to minimize risk.
Compliance Risk
Managing a company’s regulatory compliance to meet legal regulations is known as compliance risk management. Some regulators are known for being aggressive, both shortening compliance investigation timelines and imposing higher fines.
Furthermore, noncompliance can lead to public embarrassment, a bad reputation, and civil lawsuits.
There are four categories that explain compliance risk management in enterprise risk management:
Poor Compliance Risk Management: Form a compliance team to identify compliance needs and requirements and evaluate the existing compliance program.
Compliance Process and Technology: Analyze objectives and compliance and invest in new technology. Technology options range from HIPAA-compliant cloud storage to unified GRC frameworks and compliance-specific products, such as financial reporting for SOX. There are also Systems and Organizational Controls (SOC) standards that can be used to improve operations and, as a result, strengthen customer trust. Of course, understanding the differences between SOC types is critical for effective compliance.
Reviewing millions of documents: Some compliance investigations require companies to analyze and review millions of documents in a matter of weeks. Consider automated compliance workflows, platforms that save significant amounts of money in the review process.
Breach prevention: Interrupting potential breaches due to noncompliance is critical. Digital communications monitoring analyzes suspicious patterns in digital messaging, such as employee texts and emails.
Risk management statistics
More and more companies are investing in IT risk management. Information credit: Hyperproof.io
Operational Risk
Until now, risks arising from external events have been addressed in enterprise risk management. However, your own business is also a source of risk.
Operational risk is an unexpected failure in your company’s daily operations. It can be a technical failure or a failure caused by people.
Operational risk is anything that disrupts your company’s operations. In some cases, operational risk has more than one cause.
For example, consider the risk of an employee writing an incorrect check.
This is both a «human» failure and a «process» failure.
In some cases, operational risk can also arise from natural events such as a power outage or a natural disaster.
To effectively mitigate these risks, organizations often employ an employee monitoring system to improve process accuracy and prevent costly errors.
Operational issues can also prevent your company from serving its customers, resulting in lost revenue and damage to your reputation.
Financial risk
Financial risk refers to the inflow and outflow of money and the possibility of sudden financial loss.
There are a range of challenges that businesses face, particularly credit, liquidity, and market risks.
Credit risk arises from potential defaults on financial obligations by debtors, highlighting the need for rigorous credit assessments.
Liquidity risk, on the other hand, refers to the inability to meet short-term financial obligations, underscoring the importance of maintaining adequate cash reserves.
Market risk involves the uncertainty of financial losses due to market fluctuations, making it crucial for businesses to adopt diversified investment strategies to mitigate potential impacts.
In this area, sound financial planning and smart cash flow management play a key role.
Furthermore, the advent of financial technologies (FinTech) has transformed risk management.
FinTech solutions, through innovative tools such as real-time analytics and automated risk assessment platforms, have enabled businesses to better manage financial uncertainties.
Below are some tips for financial risk management in business risk management:
Have insurance: Insurance is designed to protect your business from potential losses that you cannot compensate for.
Ensure sufficient emergency funds: Having adequate emergency funds will be critical in unexpected situations.
It is essential to have a small emergency fund, but even more important is to have a separate savings account for a long-term crisis.
Invest with diversity: While investing in different businesses doesn’t guarantee a financial security plan, it will reduce the risk of total financial failure.
Have a financial backup plan: The best way to counteract the loss of your job is to have an alternative job that offers financial security or a plan to find a new one soon.
Know when it’s the right time to exit an investment: If you’re smart, you can always control how much you’ll ultimately lose.
Business Risk Management: How to Manage Risk in Business
Business Risk Management: Identifying Risk
In enterprise risk management, understanding risk is just as important as identifying it.
Personnel from diverse backgrounds are best placed to effectively identify all risks.
The risks identified by a particular group of personnel may be completely different, but just as crucial as other risks identified by other groups.
Each person in your company has a unique experience, so they can detect risks that others might miss.
Enterprise Risk Management: Risk Assessment
Once you’ve identified your risks, begin assessing them. This will involve both quantitative and qualitative processes.
You need to address different factors, such as frequency of occurrence.
Enterprise Risk Management: Measurement and Reduction
The next step is to reduce, measure, and, if necessary, neutralize risks. Doing so should minimize the company’s risks and minimize its damage. This often involves implementing processes to eliminate avoidable risks once identified.
Enterprise Risk Management: Monitoring and Reporting
Monitoring and reporting on these risks ensures the effectiveness of the plan. Above all, it ensures the effectiveness of your solutions in terms of their ability to manage potential risks.
Reputational Risks and How to Manage Them
Reputation is everything in business. A damaged reputation can cause a sudden loss of revenue and be a major turnoff for customers. Furthermore, a poor reputation can cause staff to leave your company.
In addition, you may find it difficult to recruit good replacements, as potential applicants may have heard about your poor reputation.
Suppliers may start offering less. Advertisers or sponsors may decide to let you go.
Statistics on Reputation Damage
Reputation damage can negatively impact your company’s bottom line. Image credit: Varonis Blog
Here are the steps you can take to eliminate or control reputational risk.
- Include reputational risk in strategy and planning
Research the shortcomings in your business and identify relevant reputational elements. Visualize possible scenarios that could damage public perception. Determine indicators and alerts for each element to know when to take action.
- Control processes
When you have solid processes, it’s much easier to avoid reputational risks. Standardization, technology, policies, and procedures reduce the likelihood and severity of reputation-damaging events.
Today, reputational damage most often occurs through social media. With solid processes, such as a standard tone of voice or a content calendar, this can be easily avoided.
- Understand that all actions can affect public perception
Senior management must recognize the importance of reputational risk management, and middle managers must lead by example to spread positive messages to key stakeholders.
Organizational training and procedures can ensure that all employees know how to behave and respond appropriately to any situation.
- Understand stakeholder expectations
When you know customer expectations, it is much easier to meet them.
Don’t try to raise expectations that are too high by promising deals you can’t deliver.
You should also set clear expectations for each stage of project execution, including what is expected of clients.
- Focus on a positive image and communication
It is essential to always convey positive messages to the public and your clients.
Over time, this will strengthen your reputation with the public and, in turn, reduce the impact of any future damage.
How to manage political risk in international business
How to manage political risk in international business?
This is a common question in enterprise risk management asked by companies that make a serious mistake by ignoring or underestimating political risk.
Political risk can pose significant problems for many companies.
Most companies fail to measure or manage political risk.
However, effective political risk management can allow them to access and explore new markets and business environments, giving them the potential to gain a competitive advantage.
Review Forbes’ three-step process for managing political risk in enterprise risk management:
Identify risks: Risk managers identify the main political risks by geography. The key question at this stage is: «How might political regulations affect our objectives?» They study the types of political risk, ranging from capital controls to tax increases and strikes.
Measure: Risk managers assess and quantify the potential impact of each scenario on the business.
For example, a discounted cash flow analysis can be used to estimate the financial impact of specific events and help companies understand their tolerance levels.
Manage: The first element of political risk management is mapping potential risk management methods against priority risks. Once your company establishes an action plan, your team can assign tasks and establish a schedule for consultations, reports, and reviews, just as with other risk controls.
FAQ:
What are the main benefits of enterprise risk management?
Some key benefits include reducing the likelihood of threats materializing through proactive mitigation, minimizing financial losses and disruptions when risks arise, gaining a competitive advantage over less-prepared competitors, and gaining greater insight to optimize strategic decisions.
When should enterprise-wide versus project-specific risk assessments be conducted?
Conduct enterprise-wide risk assessments annually to assess key risks across the business. Also, conduct targeted risk reviews before major capital projects, new product launches, expansions into new markets, etc., to identify specific threats for new initiatives.
What do risk management frameworks like ISO 31000 cover?
The frameworks provide guidelines that establish the context, identify risks, analyze potential impacts, establish appropriate assessment criteria, effective mitigation tactics, appropriate levels of risk treatment based on severity, and continuous monitoring of emerging threats.
How much does an automated enterprise risk management software system cost?
Prices vary considerably depending on the number of users, the sophistication of probability and impact modeling capabilities, the size of the historical risk database, integration needs, etc., but enterprise solutions are estimated to cost $10,000 to $100,000 per year or more.
Conclusion:
Effective enterprise risk management is a strategic imperative, more than simply a regulatory compliance measure, for businesses operating in today’s uncertain landscape.
By taking a proactive stance in risk assessment and mitigation planning, guided by established frameworks, businesses can improve their resilience, preparedness, and decision-making to create long-term, sustainable value.
The insights generated and the vigilance instilled through robust risk management capabilities distinguish organizations best positioned for prosperity, regardless of future threats.
Risk-Intelligent Governance: A Practical Guide for Boards of Directors
The following contribution is from the North Carolina State University (NC State) website, a leading research university that prepares its students for lifelong success.
As this white paper from Deloitte LLP states, in many organizations, risk governance is viewed as the opposite of a value-adding process or activity.
It is important to understand that risk governance and value creation go hand in hand.
Risk-intelligent governance seeks to integrate risk management procedures for all risks an entity must face, not avoid them entirely.
This white paper is part of Deloitte’s «Risk Intelligence» series and offers detailed steps board members can take to help their organization develop better risk governance and oversight procedures. The six key steps are as follows:
- Define the board’s risk oversight function
It is important for a company to define the board’s risk governance responsibilities. Boards are expected to set the tone for management and express their expectations regarding risk. They should also communicate risk management procedures to management and give them a high priority within the company.
The board should oversee management’s risk management processes and participate in the risk oversight process. In some cases, it may be appropriate for the board to assign certain risk responsibilities to specific committees; however, these committees must understand that risk oversight is not the responsibility of a single committee, but rather of the board and management as a whole.
If risk management responsibilities are assigned to independent committees, these committees should meet and discuss their findings with the full board to foster the understanding that risk oversight is the responsibility of everyone in the organization. The roles of each committee should be explicitly defined.
The board of directors should also be composed of people with extensive knowledge and experience.
It is critical that its members hold inspiring and open conversations about risk management and that diverse perspectives are available.
It can be beneficial to conduct an assessment of the board members’ experience and expertise.
In addition to board composition, board members should also conduct on-site visits to better understand the company.
This will help them identify significant risks and connect with the employees who will be required to uphold this intelligent risk management philosophy.
An enterprise-wide risk management framework is valuable when designing risk management procedures.
An entity-level risk management framework can help management identify its long-term objectives, its methods and procedures for managing risk, and any training programs that may be necessary if its risk management procedures are not yet incorporated.
The Deloitte white paper suggests the framework of the Casualty Actuarial Society, COSO, and the Treasury Board of Canada Secretariat as a reference point. Incorporating a risk assessment into each objective and activity will enable management to manage risk across the entire entity.
Deloitte also provides benchmarks that boards of directors have used, as well as tools that board members can use during this process.
- Foster a Culture of Intelligent Risk Management
To have an effective risk governance and oversight program, it is important to instill the board’s and management’s values regarding risk in everyone within the company.
Management’s goal should be to create a culture that is not risk-averse, but rather aware of the implications of taking risks to achieve rewards.
The board and management must lead by example by communicating appropriate risk messages throughout the company.
Board members should also collaborate with management to better understand their risk management processes.
Consistent communication is key and allows the board to express its views and guide management toward practices that support shareholder opinions.
Another way to create a culture that encourages open discussion about risk and concerns is to incorporate risk-related job descriptions.
Employees are likely to embrace risk management concepts if they believe they will be rewarded for making informed decisions.
The importance will become evident if risk management-related positions are integrated into the corporate hierarchy.
External third-party reviews are also a useful tool for creating a risk-intelligence culture.
By reviewing risk management policies, a third party can help point out deficiencies and best practices to the board of directors and management.
This can provide a method of comparison with other companies, as well as with the entity itself, over the years.
- Help management incorporate risk intelligence into strategy
Integrating risk intelligence into management’s strategy is a primary responsibility of board members.
As Deloitte describes, incorporating risk procedures at all levels of corporate strategy can help management shift from a negative view of risk to a positive view, where risk is associated with reward.
To ensure that risk intelligence aligns with management’s strategic objectives, the board can design processes for considering risk.
These processes may include guidance on prioritizing risks and subsequently allocating appropriate risk management resources to specific strategic objectives.
The entity’s risk appetite and tolerance should be defined so that management understands which risks are acceptable and which align with the entity’s strategic objectives.
Once these procedures are in place, the board should monitor the alignment of strategic objectives with risk management processes. It must be ensured that any risk-related issues are reported to management and communicated to the board of directors.
To facilitate this communication, the board should establish mechanisms to hold management accountable for risk management in accordance with the strategic plan.
This can be achieved by providing ongoing feedback on management’s ability to manage risk effectively or even through a formal assessment of its risk oversight responsibilities.
- Help Define Risk Appetite
Risk appetite is defined as the level of risk management is willing to assume with respect to specific actions or events related to the entity as a whole.
The board of directors has the responsibility to approve or challenge risk appetite levels suggested by management.
There may be different risk appetite levels for different types of risks a company may face.
Often, there are higher risk appetites associated with rewardable risks and lower risk appetites associated with unrewarded risks.
Management must recognize that some risks are inherent to its business and that a risk appetite does not eliminate all risks.
Management also needs to establish a risk objective or risk tolerance level. There are likely risks that an entity is unwilling to assume, and developing a risk tolerance level will facilitate communication of those risks.
Risk tolerance differs from risk appetite in that tolerance levels should remain within risk appetite.
Risk Tolerance vs. Risk Appetite
Risk appetite is typically a percentage of revenue or another financial measure, while risk tolerance can be related to a specific type of activity or event.
It is important for the board of directors to help management keep the two concepts separate and ensure that their tolerance levels align with their appetite.
The board of directors should be present in this process as a resource for management, helping to define appetite and tolerance levels and ensuring their consistency.
- Execute the Risk-Intelligent Governance Process
The board of directors should collaborate with management to design risk management processes that are effective and generate value for the entity as a whole.
While it is management’s responsibility to manage risk effectively, the board of directors has a responsibility to challenge management practices if they are deemed insufficient.
The board of directors is responsible for governing risk management processes. Procedures should be established to assess whether management is implementing risk management processes in the manner communicated to the board.
To ensure management fulfills its risk management responsibilities, the board can evaluate its performance, assess the effectiveness of risk management procedures, and create a mechanism to hold management accountable for its risk management actions.
Communication between the board and management is critical, and the board is encouraged to discuss any issues with management if there are concerns about certain risk management practices.
- Governance Process Assessment
In addition to benchmarking risk management processes, risk governance processes should also be reviewed.
Risk governance is an ongoing process that can be monitored and compared internally or externally.
To gain insight into its performance, the board could request periodic feedback reviews from senior management on its risk governance responsibilities.
To prepare for the review, the board would benefit from taking appropriate training courses, as well as conducting individual research on risk management in the internal and external environment.
During the board’s annual self-assessment, risk should be analyzed and the effectiveness of governance assessed.
These six focal points support the idea that measures taken to mitigate risk are as important as taking risks in driving growth and profit.
While risk mitigation is important, management’s objective should not be to avoid it completely. Certain risks are necessary for a company to operate effectively.
Risk-intelligent governance can facilitate the allocation of risk-related resources, enhance competitive advantage, and ensure an entity’s long-term growth.
By developing a risk-intelligent program, the board strengthens management’s ability to achieve strategic objectives while protecting the company from risks that may arise.