In today’s challenging environment, it has become extremely difficult to create sustainable growth in stakeholder value.  In order for organizations to pursue opportunities to boost profits, boards approve strategies and monitor the risks associated with these strategies. This paper, authored by Norman T. Sheehan, notes how recent studies conducted by PricewaterhouseCoopers and Ernst and Young show that a low percentage of organizations actually link risk management to their strategic planning process.  Most organizations address risks as an afterthought.

Boards can have a profound effect on creating stakeholder value during the strategic planning process.  In order to achieve this main objective, boards must incorporate a detailed risk identification and mitigation analysis into their strategic planning process.  Before a board approves the opportunities encompassed in management’s proposed strategy, the board may want to formally consider the following three questions:

  1. Has management identified all opportunities which exploit its game-winning resources and activities?  Here are some considerations to help make this happen:
    • Ensure that strategies maximize the potential of an organization’s resources.
    • Determine what resources need to be improved in order for the organization to be successful.
    • Establish what resources are needed to be competitive.
  • Decide what resources are needed to achieve the greatest increase in stakeholder value.
  1. What are the risks associated with each opportunity? To answer this question, the white paper suggests the following:
    • Evaluate strategic risk – what could undermine the proposed strategy.
    • Determine operational risk – what limitations in current operations will restrict the organization’s success in the proposed strategy.
  • Examine compliance and financial reporting risk – how might the strategy affect these risks, in addition to affecting risks related to the organization’s reputation.
  1. What are the potential risk treatments?  The white paper analyzes four types of risk response that boards should consider as they identify risks potentially affecting the strategy:
    • Avoid the risk by not pursuing certain strategies.
    • Transfer the risk by looking for partners or other counter-parties who might share in the risk taking.
    • Mitigate the risk by implementing actions to lower risk exposures.
  • Accept the risk – determine that the amount of potential risk is within stakeholder appetite for risk-taking.

Taking these steps to analyze risk can help an organization improve performance through more proactive risk oversight.  The board must adopt a strategy that balances the need to pursue profitable opportunities, while managing the associated risks to be within an acceptable appetite for risk-taking.  The board’s utilization of appropriate risk management tools can help foster growth in stakeholder value.   

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Link: Journal of Business Strategy, Volume 30, Number 1. Author: Norman Sheehan.

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ERM Enterprise Risk Management Initiative 2009-10-01