Strategic and Business Risk Management – What Company Directors Need to Know (Part 1)
Directors are well aware that it is no defence to say “I didn’t know” or “I was not informed” when it comes to company matters – as a director, it is your duty to ensure you are informed.
This puts strategic and business risk management high on the agenda for any company director.
By business risk I mean any circumstance or factor that may have a negative impact on the operation or profitability of a company. It could be an external or internal condition, it may even be a factor that is not clearly evident.
The main types of business risk are:
Many of these risks have the acts and omissions of employees at their core. This blog will focus on strategic risks. I’m going to follow up with another post highlighting people risks, and providing two case studies on business risk management.
Understanding business risk – key questions to ask
Any director trying to get a handle on the risk profile of their business should ask:
- Context – What are the objectives? Who are the stakeholders?
- Risk identification – What can happen? How? Where? Why can it happen?
- Risk analysis – How likely is it? What are the consequences?
- Risk evaluation – What controls exist? What else could be done? Rank each risk.
- Treat the risk – Identify then evaluate the options, implement a risk mitigation plan and monitor the plan.
Directors’ duties and responsibilities
It’s important that directors understand the difference between “business risk mitigation” and “taking risks”. The business judgement rule applies to risk assessment and a key role for directors should be to ensure that corporate management is continuously and effectively striving for above-average performance, taking account of risk.
There are many challenges directors will face in managing business risk. A common challenge is lack of cohesion and communication between the board, CEO and executive team, which can lead to poor decisions and poor selection of strategic options.
It’s important that directors understand the substance behind management’s strategy development process. Be clear with the CEO and management on what you wish to be informed about, and ensure they do this.
It’s also crucial to focus on “are we doing things right?” (financial and compliance audits) versus “are we doing the right things?” (managing the strategy process and the risk assessment inherent in the strategy).
Other common challenges include sensitivity to “interference” with the CEO role, a lack of independent expert opinion, boards who allocate too little time to real debate and discussion of strategy development, risk identification and mitigation and those who have too little informal interface with management teams.
Strategic and business risk management
A key to preparing for business failure, and therefore the risk associated with failure, is to stress test the strategic plan and business. You need to know: what is the ability of the business to adapt?
These days, financiers and stakeholders are demanding a greater focus on forecasts and risk mitigation strategies.
While responsibility rests with management for stress testing, directors have an obligation to be properly informed to ensure that management teams are putting the right initiatives in place to “bulletproof” the business.
Business stress testing
Directors need to be aware that even if the business is not directly affected by a disaster or changing market conditions, relationships with other stakeholders who have been directly impacted can seriously affect your business.
You may blame a poor financial result on the GFC, natural disaster, regulation, lack of support from financiers, and so on… BUT what have management and directors done to ensure you have mitigated your risk through business stress testing and other risk assessments?
Vantage Performance is Australia’s leading business transformation and turnaround firm – solving complex problems for businesses experiencing major change. This blog post is adapted from a presentation to the Australian Institute of Company Directors.