By: Sandi Verrecchia @satoriinsight
The Canadian dollar continues to decline. The Bank of Canada is deciding on whether or not to further reduce interest rates. Borrowing is at an all-time high, financial literacy of Millennials is low and the economy is struggling to deal with the oil price shock. All these issues and more heighten the need for organizations to truly understand and articulate their risk appetite. Conversations about risk must be taking place at the board table as well as at the executive level and throughout the various levels of the organization. Organizations that have articulated risk strategies or statements are well positioned to make good strategic decisions in the wake of the uncertain times we are operating in. Understanding risk is not a function of eliminating it but rather a function of managing it and managing it well.
As a business therapist, I define risk tolerance as the amount of risk that an organization is comfortable with or the degree of uncertainty that an organization is able to handle to achieve its strategic objectives and business plan. Risks are all around us but being able to identify key risks and clearly understand the impact is the first step.
- Risk identification process. Not all risks are equal and the magnitude of impact to the organization can differ greatly. The first step is to identify all the risks and scenario plan each of them to think through the worst thing that could happen as a result of the risk. Rank all the risks and choose the top risks that need to be top of mind. 4-6 risks at the enterprise level should be sufficient.
- Measure. On-going measurement of risks is as important as identifying them in the first place. Thoroughly understanding the risk will help determine the best way to measure the risk.
- Implement effective monitoring and risk mitigation activities. Are the identified risks becoming more likely, staying the same or becoming less likely? On-going monitoring will help keep on the pulse of the risks to ensure that they don’t sneak up. Having thought through the actions that will be taken in advance of the risk becoming a reality is an important strategy to minimize the impact of a risk. Putting out a fire that you did not see coming is very reactionary and is less effective than stopping the fire before it happens.
- Create a risk culture by sharing. As I mentioned in the outset, understanding risk is not a function of eliminating it but rather a function of managing it and managing it well. To do this it is important for all areas of the organization to be risk conscience and diligent at managing risk. This can be construed as a negative approach but in reality it is a positive strategy that keeps the proverbial “eye on the ball” and lessens the potential impact of something that could have been managed.
“Risk — let’s get this straight up front — is good. The point of risk management is not to eliminate it [but] to manage it… to choose where to place bets and where to avoid betting altogether.”
– Managing Risk in the 21st Century, Thomas A. Stewart, Fortune, 7 February 2000
CMC, CPCC, MBA
Sandi Verrecchia is a Certified Management Consultant, holds a Masters degree and is a professional Leadership Coach. With over 20 years of experience in the financial services, academic and not for profit sectors, her diverse background of consulting, operations, marketing and sales is a wonderful compliment to her passion for coaching.