STRATEGIC RISK MANAGEMENT: TOWARDS RISK ADJUSTED PERFORMANCE
Organizations must take risks to earn returns for their stakeholders. The ISO 31000 standard defines risk as “the effect of uncertainty on objectives”. Therefore, by definition, risk management must be “the management of the effect of uncertainty on objectives”. Objectives are business outcomes. This makes risk management “outcome management”.
The ultimate goal of any organization is to achieve superior performance. To this end, Strategic plans are prepared detailing the key value drivers or the “crown jewels”, and the resulting rewards that would be attained from leveraging on these value drivers. Yet, most organizations fail to put risk into the context of overall performance.
Performance and risk management are two sides of the same coin. Both have the same objective of steering the organization toward superior performance and the achievement of key objectives. The difference is that performance management mainly deals with the known universe, tracking past events, whereas risk management deals with uncertainty.
The purpose of a strategic risk analysis is not to avoid all risks but rather to manage risks to gain greater assurance of reaching organizational goals. Risk-and-return relationship must remain top of mind by implementing tools and techniques that look at goals based on risk-adjusted returns. Putting the focus on risk-adjusted return targets and then monitoring performance against those targets will help ensure the organization fully appreciates the risk it is taking and appropriately measures the returns it expects to achieve.
Risk-adjusted return is a measure of the promised return from executing a strategic initiative, relative to the risk of that strategic initiative, over a specific period. Risk adjusted measures of performance lead to materially different strategic decisions on capital allocation and investment or disinvestment from a business activity compared with the non-risk adjusted performance measures. Organizations seeking to place risk in context with performance have a lot to gain.
Strategic Risk Management
All organizational and shareholder value is derived from managing uncertainty. This uncertainty is inherently present in any strategic initiative or activities that any organization plans to be engaged in. Performance and risk therefore, are two important perspectives from which uncertainty in making strategic decisions must be considered.
Simply stated, performance and risk management are two sides of the same coin. Both have the same objective of steering the organization toward superior performance and the achievement of key objectives.
At Risk Africa, we are focused on working with the Board of Directors and Management in correctly aligning performance management to risk management. Specifically, our service offering in strategic risk management include:
· Review of the strategic plan and especially the correct description and appropriateness of the performance measures
· Strategic risk assessment which entails risk identification, risk measurement, risk prioritization and risk monitoring
· Mapping of strategies to risks
· Developing risk adjustment performance measures
· Setting up tools for strategic risk monitoring and reporting
· Strategic risk awareness training
· Embedding the right culture on performance management and risk management
For more information on linking performance management to risk management, contact us on firstname.lastname@example.org.
© RiskAfrica 2015.