Governance is a structured approach to sustainable business growth through performance and conformance. You might think that risk falls into the ‘conformance’ aspect of governance but it is as much about performance as it is about conformance.
If you do not fully understand the risks that your enterprise faces, you miss out on the opportunity to unlock their value.
As an example, you might have a major contract that has significant penalties for delays in delivery. The board is emphatic that you must mitigate this risk.
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In doing so, you reduce the production time by a number of days by investing in a new piece of equipment at a reasonable price.
The result is both a reduction in risk and an increase in your competitiveness, which leads to new business. If your board had not made you deal with the issue, you have not unlocked this value.
Here are some ways that you and a board can add immense value through risk.
Risk appetite is the level of risk that a business is willing to accept – from conservative to aggressive. The variances are referred to as the tolerance levels that directors will allow management to take.
Agreeing on risk appetite and tolerance is a strategic consideration of the level of risk required to activate the business model. This gives management a clear guideline on the risk boundary.
Defining the Framework
Risk management does not mean removing every risk; you cannot put your business into a bubble and hope that it can still operate successfully in a dynamic economy.
Risk management means understanding the risks, determining the options to reduce or mitigate risks and choosing the best option for the specific company.
A risk management framework defines how you will manage risks from end-to-end and is highly useful in bringing momentum and consistency to risk.
Reviewing and Monitoring
When a risk is identified, it should be addressed, put onto an action list and managed effectively.
One of our clients managed an operational risk through performance bonds, which are surety bonds usually issued by a bank to mitigate supplier risk.
They did not correctly manage the timeframes for their supplier’s performance bond letters. When a supplier failed to deliver, it was ascertained that the supplier’s performance bond had lapsed and they were not covered. The board’s timely and regular review of risk could have prevented this issue.
Cost of Risk
We advise that directors challenge themselves to allocate a cost to every risk, which, along with the weighted probability and impact, provides a weighted cost of that risk.
This provides a deeper understanding of the true impact on profitability and sustainability.
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For example, what might be the collective cost of an ongoing IT issue compared to the once-off cost of a high profile risk? If you put pen to paper, you might be surprised at the small steps you can take to unlock risk value.
Pulling the Handbrake
One argument against governance is that it is a handbrake that slows the business down.
Governance does bring a different approach to making decisions, including the consideration of the impact of those decisions from many angles. Sometimes a handbrake can save a business.
At other times it is the independent directors who release the handbrake and force management to take the opportunities that reduce other risks and provide the foundation for the next round of growth.