CEOs of large, global non-financial companies are now absorbing the latest ideas and best practices in the realm of enterprise risk management (ERM). They are dispatching trained managers to spread a sense of urgency to the whole workforce and fortifying managerial processes that will systematically anticipate, identify, quantify, and mitigate major risk events when they—inevitably—emerge. What does this mean?
Because operational risks can summarily be addressed with insurance, CEOs should focus on what can be considered major risk events, such as scenarios that (if materialized) could severely damage the enterprise’s strategy, reputation, competitive stance, or desirability in the eyes of customers.
A sound ERM framework can enable the CEO and his/her senior managers to cope with potential major risk events. Though it won’t give them the power to predict the next major event with absolute certainty, it will alert them to (and prepare them for) the appearance of such an event. Thinking about and preparing for major risk—whether strategic, financial or operational in nature—is achieved by integrating the management of major risks into key processes.
A clear message about accountability for risk versus reward must go out to the front lines, albeit in a delicate and controlled manner. Without scaring people, CEOs must explain the need to take well-understood risks to drive performance. And if/when a major risk materializes, managers who are deemed to be owners of certain risks must be equipped to act appropriately and make sound decisions. Detailed scenario analysis, game theory, and other techniques can reduce the guesswork of risk management.
Never mind the ability to raise capital or attract desired talent—major risk events are game changers. CEOs must drive the right message, invest in the proper processes and people, and carefully monitor major risk/reward management like a hawk.
For a more detailed analysis on how to cope with risk and what must happen to reduce the number of mistakes, see What CEOs Must Do About Risk Now in APQC’s Knowledge Base, available at no charge to the public.