Strategic risk management — an inventory

Recent events such as the financial crisis and the earthquake disaster in Japan have increased focus on risk management in multinational companies across industries. However, companies that take a true strategic approach to risk management are still the exception rather than the rule. And this is despite the fact that the importance of good strategic risk management for the success and survival of the company is well recognized by many executives. Two independent studies conducted in 2010 and 2011 by the Economist Intelligence Unit (EIU) and Harvard Business Review Analytic Services (HBRAS) come to this consistent conclusion. The studies were sponsored by ACE and KPMG and the Zurich Financial Services Group.

Results of the study

The two surveys show that strategic risks, i.e. those that pose a threat to the company's ability to successfully implement its strategy, have become more relevant for many companies in recent years. More than half of the managers surveyed in the HBRAS study (55%) ranked personnel risks (e.g. acquisition and retention of key functions) among the highest risk factors. Other strategic risks frequently mentioned in the HBRAS study include corporate and brand reputation (50%), business continuity planning (49%) and legal risks (48%). Respondents to the EUI study even stated that strategic threats, such as weak demand and market fluctuations, were the biggest risks for their companies in the next 12 months.

The proactive identification and analysis of new and emerging risks is regarded by many managers as one of the most important goals of risk management. However, only a few are satisfied with their organization's efficiency in anticipating risks. Just 34% of respondents to the EUI study were positive about it. In fact, it was only 28% in the HBRAS study.

And many managers are also well aware of the benefits of risk management for the quality of strategy work. A good third of the respondents to the HBRAS study stated that their quality would be strengthened by improved strategic decision-making (39%), improved corporate governance (34%) and increased management accountability (31%).

Risk management and strategy work in companies barely linked

However, there is no or only insufficient integration of risk management and strategy work. Less than half of the respondents to the EUI study stated that risk management plays a formal role in defining the overall corporate strategy (44%) and in strategic decisions, such as evaluating new market investments (46%). And only 46% of survey participants believed that their organization was effective at linking risk management to the overall corporate strategy. In the HBRAS study, just a third of respondents were convinced of the efficiency of combining risk information and strategic planning and decision-making in their companies.

Persistent cultural barriers are consistently regarded as the most important hindrance to effective strategic risk management. The HBRAS study quotes a Chief Risk Officer as saying:”The Barriers are almost always cultural, not technical”. On the one hand, risk management in many companies does not get the necessary backing from management; on the other hand, risk officers tend to focus on the operational aspects of their work, which prevents them from forming a stronger strategic focus. Formal, structured processes that enable the continuous exchange of strategic risk information across the various business areas are often not available. However, this is a prerequisite for being able to make decisions based on a broad knowledge base and a solid understanding of the facts.

The authors of the EUI study therefore come to the conclusion that strategic risk management is still an “immature” activity. And the authors of the HBRAS study also rate the path towards a “lived risk culture”, in which risk management is an integral part of every employee's daily thinking and action, to be long. They rightly sum up that there is a noticeable gap between the perceived importance of risk management for strategy work by many executives and the current state of practice in companies.