Essential Duties in Risk Mitigation
In today's dynamic business environment, recognising and reacting to significant opportunities and risks is crucial for companies. A firm that swiftly identifies a unique opportunity or risk and utilises this knowledge to evaluate its options, either before others or alongside other early movers, is often at an advantage.
The process of strategic planning involves focusing on what is not known, and this is achieved by defining critical assumptions that represent the management's view of the business environment. Understanding and addressing the implications of change should be high on everyone's list, although the article does not specify a particular view as the most important risk management task.
A strong contrarian voice is occasionally necessary in an organisation's history to recognise changing paradigms and the need to innovate and adjust. Management and directors select contrarian statements that are likely to have the greatest impact on the company's ability to execute its strategy and business model. For high-impact contrarian statements, management should develop implication statements that address the questions "What would we do if this assumption underlying our strategy were no longer valid?" and "How would we know if the assumption is no longer valid or is becoming invalid?"
The ability to adapt to a changing business environment is crucial. Fostering an organisational culture that encourages managerial intuition and ingenuity is essential for translating information regarding altered strategic assumptions into actionable revisions. The analysis process helps management and directors understand the implications of change and what needs to be monitored closely to detect a change.
Assumptions cover various aspects such as the enterprise's capabilities, competitor capabilities and likely actions, expected customer preferences, technological trends, capital availability, and regulatory trends. Companies that demonstrate the ability to adapt to a changing business environment are seeking to make their organisations resilient so that they have the ability and discipline to act decisively on necessary adjustments to strategic and business plans in response to changing market realities.
A notable example of a company that successfully navigated a changing business environment is TD Bank Group. In the years leading up to the financial crisis, the bank took action to exit the structured products business, avoiding the subprime mess and remaining a viable player in the marketplace today. Conversely, the closure and receivership of Washington Mutual could have been avoided if risk management had been viewed as a strategic discipline rather than a tick-the-box, compliance exercise. Washington Mutual, a financial institution, filed for Chapter 11 voluntary bankruptcy in 2008, making it the largest bank failure in American financial history.
The enablement of a contrarian voice is a matter of proper positioning of independent risk management/compliance functions. This includes leaders being viewed as a peer to business-line leaders, having a direct reporting line to the CEO, having a reporting line to the board or a committee of the board, conducting mandatory and regularly scheduled executive sessions with these functional leaders, and having a formalized escalation process.
In conclusion, early mover advantage and effective risk management are vital for companies in today's complex and ever-changing business environment. By focusing on what is not known, understanding the implications of change, developing a strong contrarian voice, and fostering a resilient organisational culture, companies can position themselves for success in the face of uncertainty.
