Alan is one of the smart CEOs who have understood that proactive, risk-adjusted decision-making and effective management of capital is critical for success in business. He is looking to counter risks, boost operational effectiveness, improve business processes and mitigate costs.
Jack is an efficient enterprise risk management software professional who emphasizes on developing ERM proficiency in the organization. He believes that effective risk management can be achieved by developing the skills of the workforce and motivating them to apply those skills efficiently.
He very well understands that his leadership and the top management’s involvement play all-important roles – the actions of a leader are the most important factors that determine the culture of risk management within an organization.
The first step is risk evaluation and risk aggregation
Identifying and understanding individual risks is not enough. The company must look at inter-linking and far-flung occurrences. Keep eyes open to look at extreme factors as well. There are many occasions when events of low probability, yet high severity, drastically affect the normal functioning of an organization. Critical uncertainties have to be judiciously factored in. Quantitative tools are good, but informed decisions are indispensable.
Although risk assessment tools are impressive, today’s unpredictable business world makes extreme risk events increasingly unpredictable. This is where qualitative decisions of the experienced risk manager and leadership team come into picture. It is important to be mindful of the hypothesis and limitations of the analysis tools used in prediction of risk.
It is important to ascertain the company’s risk appetite.
The risk management team has to determine the organization’s choice of trade-off between risk and reward. Ascertaining the company’s risk appetite allows informed judgement on the risks that have to be embraced, and the ones that have to be excluded.
Most importantly, a healthy risk culture must be deep-rooted in the organization.
Risks cannot be consigned only to the back office. Every employee in the company must take accountability for effective risk management. Besides risk assessment being well built and top-down, operational risk management competence must be functional across the organization, not exercised in silos. Its role within the organizational structure must be defined and enforced strongly so that it can accurately sustain corporate objectives.
With a risk manager like Jack, Alan is one happy CEO. Are you as proficient as Alan’s risk manager? Do share your comments and thoughts on the risk management strategies in your organization.
Watch this space for more Alan & Jack episodes!
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