10 Famous Models Who Were Told They Were Too Fat
Risk management as applied to this uncertain business environment may not mean becoming more risk averse; instead, executives overseeing risk management should consider becoming more risk intelligent, notes Henry Ristuccia, partner, Deloitte & Touche LLP, and global leader, Governance, Risk and Compliance Services, Deloitte Touche Tohmatsu Limited.
“Senior executives should consider a systematic way to make decisions about risks and reward," he says. “Value and risk cannot be meaningfully separated. Risks to existing assets may need to be guarded against and certain other risks may need to be taken to create new value." Risk management should also focus on understanding and managing the risks of the strategy itself. Identifying and addressing the risks of non-compliance with regulations, operational failures and lack of integrity in financial reports are essential activities but are not sufficient for competitive advantage.
A diet of pure risk aversion could lead to extinction, according to Frederick Funston, co-author with Stephen Wagner of the book Surviving and Thriving in Uncertainty: Creating the Risk Intelligent Enterprise. The book suggests that some level of failure is important for innovation and experimentation.
Each company might want to consider its own level of acceptable versus unacceptable risk, but intolerance of any level of failure may lead to risk aversion and competitive disadvantage.
Risk Intelligent Management
“Risk intelligent management introduces a way of thinking about risk, in which failure is defined as much in terms of missed opportunity as it is in loss," observes Mr. Ristuccia.
The approach can be boiled down to 10 risk intelligence skills, which are discussed in the book as risk management techniques that can be used for challenging times. “These 10 skills can help company leaders exercise appropriate judgment and make good decisions under even the most uncertain and chaotic conditions," Mr. Ristuccia says, noting there are often a number of factors to consider to manage risk appropriately. The 10 skills discussed below are presented as considerations rather than a prescription to help make effective risk management decisions. There may be other considerations depending on the individual facts and circumstances in any given situation and reasonable risk management decisions may differ.
10 Skills to Consider
1. Check your assumptions at the door. Simply conducting business based on tradition, habit or operating on autopilot can lead to ruin. On the other hand, executives charged with risk management can identify major shifts in advance and determine whether they are beneficial or adverse by modeling the antitheses to current assumptions about the business environment and the company’s existing business model.
This practice can enable a company to defend against so-called "black swan" or unexpected and disruptive events. Or they can become the industry black swan by adopting an offensive position.
2. Maintain vigilance. To identify a danger sign, first, try to identify what you are looking for (black swans), then consider setting up appropriate detection mechanisms and developing a range of potential responses.
3. Factor in velocity and momentum. Instead of just asking, ‘How likely is it that this event—good or bad—will happen?’ ask instead, ‘How good or bad can it get and how fast can it get that way?’ Those questions help frame what the organization can do to improve its resilience and agility—regardless of the size of the risk factor.
4. Manage important connections. The complexity and interconnectedness of the global business environment may make it difficult to see how one set of events can affect another. This skill and the corresponding tools available to help implement it may help the enterprise understand its critical dependencies, how long it can go without them and how it can improve its chances of survival.
Managing important connections may be based on an in-depth understanding of the organization, knowing where vulnerabilities lie and making conscious decisions about which ones to accept and which to mitigate.
5. Anticipate causes of failure. Discuss constructively how the business might fail in order to prevent such failure. It is advisable to identify potential failure quickly and escalate it to the appropriate level for remediation.
One tool of quality and process improvement, Failure Modes and Effects Analysis (FMEA), poses forward-looking questions to help locate areas of risks or the possibility of missed gains. After one private equity firm learned during the acquisition of a well-established family business that family tradition can get in the way of rapid responses to market changes, it now applies FMEA to every transaction proposal to improve anticipation of failure factors.
6. Verify sources and corroborate information. Having credible sources and corroborated information help to exercise appropriate judgment. The first U.S. Secretary of Homeland Security, Tom Ridge, has said that his department approached corroboration by getting “as much awareness as you possibly can…Have we had information from that source or sources before that proved to be accurate? Did they tell us something six months ago or a year ago that turned out to be right? Can we corroborate from another source? Do we hear other sources talking about the same thing? Is it credible; is it corroborated?"
7. Maintain a margin of safety. No margin for safety may leave no margin for error. Effective leaders often have confidence in their abilities, but also know their limitations.
8. Consider how to set your enterprise time horizons. Effective company leaders are mindful of critical strategic considerations to help promote success in areas that require long-term thinking, such as global competitiveness, R&D investments, environmental sustainability and corporate responsibility.
According to the book, companies that emphasize immediate profit over sustainability and long-term growth may jeopardize their chances of long-term sustainability
9. Take appropriate risks. Competitive advantage may call for calculated risk-taking. Every organization should understand the risks it is taking and decide whether the potential for reward warrants the risk.
Companies should consider their appetite for rewarded risks, such as those associated with new product development or new market entry and whether they have a much lower appetite or tolerance for unrewarded risks, such as non-compliance or operational failures.
While the CEO may propose risk appetite levels, the board is often charged with whether to approve them—or challenge them and send them back to the CEO for adjustments—based on an evaluation of their alignment with business strategy and stakeholders’ expectations.
10. Sustain operational discipline. According to the book, this is an important risk intelligence skill. Without it risk intelligence may not be able to be implemented or maintained; assumptions may not be able to be challenged; warning signals may not be able to be detected and so on.
Executives overseeing risk management may need to work with other leaders in the organization and the board to strike an appropriate balance between controls and compliance and the competitive strategy for future growth.
Risks may need to be taken to seize opportunities, and they may need to be managed, not simply avoided. Applying these 10 skills can aid in bringing superior judgment and competitive position in an ever-changing and predictably uncertain environment.
