There is a disconnect in today’s businesses that is causing significant losses in market value. That disconnect is shown in two ways. First, many companies equate risk management with risk aversion. That is, instead of actively monitoring and measuring the risk controls they put in place, they are simply setting the controls in place for maximum risk avoidance and then letting them ride.
Second, companies are focusing their risk management on the wrong areas. They are so concerned about the legal and regulatory requirements of compliance that they have practically forgotten about managing strategic risk in growth and operations, which are the main culprits in losing market value.
In this article we discuss how companies are losing market value and slowing growth due to improper risk management practices.
Making Wise Decisions
These are the conclusions drawn in new research done by CEB, a US firm based in Washington, and highlighted in a recent article on the Harvard Business Review’s website. As pointed out in the article, the researchers pinpointed three best practices that smart companies should focus on. The first is understanding that risk management is not risk aversion. Unless the laws of the universe have been discarded without our human knowledge, there is still no reward without risk. The less risk taken, the less reward achieved. Remembering this must be the starting point to go forward.
The next two practices deal with decision making. 60% of officers surveyed said their company’s decision-making process is too slow, mostly because of the strong focus on preventing risk. Again, risk prevention is not risk management – it’s a way to guarantee slower growth and greater losses. The key lies in good decision making based on real-time data about the processes, which includes training and empowering front-line employees to make wise decisions in terms of risk.
Avoiding Harmful Consequences
Instead of focusing on these practices, most companies have been acting out of fear and spending their auditing efforts on legal and regulatory compliance and financial reporting, which together only comprised 5% of market value losses over the last decade. On the other hand, strategic and operating risks are responsible for 95% of those losses. Yet less than half of the time spent by auditors was in these areas. The biggest area for loss was strategic risk, accounting for 86% of company’s losses. Only 6% of their auditing time was spent on strategic and operational risk, which makes no sense whatsoever.
The fear of actions against them by the government and regulatory agencies has made companies shift their efforts to the wrong areas, but it’s really the lack of a regular and proper auditing process across other key aspects of their business that is leading to the losses.
In the simplest terms, the best risk management is done in real-time. Most companies take a “rear view mirror approach,” looking backwards at mistakes, then making a change, then moving on. The whole process starts over again when faults are found. Instead, these processes should be set in place, monitored in real-time, and adjusted using meaningful data with better decisions as they go. This is accomplished by implementing a compliance monitoring system to allow regular evaluations, such as our Compliance Checkpoint software.