Strategic Risk Management: Optimizing the Risk/Return Profile
Strategic Risk Management Helps Companies “Fail Faster” Yet Improve More Than Ever. An overview of how to measure and manage risk in business
The top priority for companies of the future should be managing strategic risk. Strategy drives the overall direction of a company, but with great responsibility comes a great risk of failure. That risk, which is at the forefront of risk management, can take many forms, including bad ideation or execution, changing markets, and emerging technologies.
While the odds of failure are alarming, the ability to “fail faster” is counterintuitively one of the best ways to improve financial performance. When a company fails faster through managing and measuring strategic risk—such as with economic capital and risk adjusted return on capital (RAROC)—it spots early- warning signs of potential problems, assesses salvageability, and creates an exit strategy, if needed. It may also decide, through risk analysis, ways to redirect its efforts to more viable options. In taking these corrective actions, companies cut their losses and optimize their gains.
Board members, corporate executives, and finance professionals will learn best practices for measuring and managing strategic risk and get insights, such as:
- The importance of strategic risk, given both the typical high failure rate of strategic initiatives and empirical studies showing that the impact of strategic risk exceeds the impact of all other forms of risk combined;
- Measuring strategic risk using economic capital, shareholder value-added, and other risk-adjusted performance measures;
- Managing strategic risk through strategic planning, risk appetite, new business development, M&A, and capital-management processes; and
- Ongoing monitoring and feedback, including the integration of key performance indicators, key risk indicators, and performance feedback loops to support board and management oversight.