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When Risk Managers Should Get Involved in Growth Decisions

Avoiding risks can be almost as dangerous to a firm's long-term health as taking the wrong ones; ERM teams have an important role to play

Outside of an excitable community of adrenaline junkies – extreme sports aficionados and the like – risk-loving behavior is generally frowned upon. Nobody wants a reckless CEO willing to bet the company’s future on a handful of magic beans. Yet too much risk aversion can be almost as bad, leaving a company flat-footed when it comes to new opportunities and relegating it to a position of follower rather than leader.

Senior executives tend to play it too safe because they are overwhelmed by too little or too much information, leaving them anxious and uncertain. But as well as being paralyzed by uncertainty, executives also often doubt the company’s ability to respond to the risks that worry them. This is where the enterprise risk management (ERM) team can join their colleagues in corporate strategy to inject some much-needed transparency and steel the nerves of senior leaders to make them more comfortable backing higher-risk opportunities.

Supporting the Right Risks

This may be an unfamiliar role for ERM teams but there are two ways that risk managers in CEB networks have partnered with Strategy to address risk responses upfront, helping to allay concerns.

  1. A banking company’s decision tree – when should ERM lean in? If the strategy team at one banking company is struggling to get a proposal approved, ERM uses a decision tree (see chart 1) to see whether and when it can be helpful.

    When the time is right, ERM provides resources to help Strategy collect risk information, sets up a risk mitigation dashboard for them, and reviews the plans. Risk then signs off, demonstrating to decision-makers that it has vetted the proposal’s risks. The result is that top executives respond in half the time they used to.


    Chart 1: Risk analysis pitch criteria  Source: CEB analysis


  2. Danger signals and backup plans: The ERM team at a large technology firm creates “safety nets” for projects that include

    • Metrics for risks in the initiative.

    • Trigger points for the metrics that signal something has gone wrong.

    • Contingency plans if the initiative hits those trigger points.

    Chart 2 shows how it works. Decision makers, now presented with ways to track and mitigate a risky initiative, feel more confident in making decisions and moving a projects forward.


    Chart 2: Strategic deal process  Source: CEB analysis


 

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