Home > Risk > Why are risk managers and consultants consumed by the negative?

Why are risk managers and consultants consumed by the negative?

The Canadian Institute of Chartered Accountants has produced a variety of excellent board guidance on risk management and other topics. Their latest effort, written by John Caldwell, is A Framework for Board Oversight of Enterprise Risk. It does not meet, in my opinion, the CICA’s normal standard.

I am concerned that Mr. Caldwell has defined risk purely from the downside and failed to consider the ability to seize opportunities to achieve or surpass objectives. Does this concern you as much as it does me?

Last week, I talked to a couple of hundred board members in Kuala Lumpur and their eyes seemed to open when I talked about the difference in receiving information about the sales forecast in these situations:

Option A: The board is informed that management’s forecast for the next quarter is $80m.The attendees’ attitude was that this is the type of information they normally receive.

Option B: Informed that management has a 70% confidence level that revenue for the next quarter will be $80m. (This is not, unfortunately, information directors normally receive). Directors should ask why the confidence level is only 70%, what are the other possibilities and what factors are involved.

Option C: Informed that management has a 70% confidence level that revenue for the next quarter will be $80m, with a 30% likelihood that revenue will reach $90m and 90% confidence that revenue will be at least $65m. Directors should start asking what actions management is taking to increase the likelihood of $90m, and to limit any downside risk of failing to achieve $80m.

When risk information is added to performance information, management and the board can take appropriate actions to optimize outcomes.

Isn’t this an important element of risk management, or are we to be limited to a Cassandra role? Is the sky in the risk manager’s world always to be falling?

Both ISO 31000:2009 and the COSO ERM Framework see the potential impact of uncertainty on objectives as being positive as well as adverse. Shouldn’t all risk managers share that view? Shouldn’t advisers to boards also see the silver lining?

  1. Mike Corcoran
    August 15, 2012 at 2:19 PM

    I saw an advance copy and thought it was designed to subsidize the forest products industry in North America. Way long and just un-interesting to read and act upon at an executive level

  2. Norman Marks
    August 15, 2012 at 2:40 PM

    Canada, Mike!

    But, more to the point, shouldn’t practitioners look at risk and uncertainty as contributing to the ability to surpass objectives – and create value?

    • August 23, 2012 at 1:20 PM

      No question, Norman and a very good topic. We have moved our practice to Governance, Value Management and Performance. I would rather help design/construct the approach to positive cash value generation than a risk management destination detached from the business model. Still R, C of GRC are important to understand but this mostly is about value preservation. We also provide help here as well.

      I am really excited about our developing approach and alliance partners even in a relatively poor economy also struggling with increasing regulatory demands especially in financial services, healthcare and energy. We are elevating the overall discussion in the CSuite and with the BOD.

  3. August 16, 2012 at 2:18 AM

    Norman,

    I love this post. Many view risk as a “4 letter word”. But to quote you “When risk information is added to performance information, management and the board can take appropriate actions to optimize outcomes.” What this means to me is that life is full of risks but appropriately managed risks can bring reward. We need to also understand the rewards gained from risks taken (or the potential reward for risks being considered) as well as the negative impact.

  4. August 22, 2012 at 6:44 AM

    Hello, Norman

    I think option C underscores a key point that Mark White made at his keynote presentation “Finance Transformation within SAP” at Financials HR GRC 2012 last March: That finance needs to lead by example — that is, lead by talking to people in operations, talking to customers, and continuing to innovate. Do you see many examples of companies following this example when you speak with your customers, or do you see most companies’ operations and finance units still operating in silos?

  5. Norman Marks
    August 25, 2012 at 4:49 PM

    Hi Gary,

    At companies I have been at, the best CFOs are active listeners to the operating folk and to customers. I prefer that they listen rather than speak – or speak after listening.

  1. August 31, 2012 at 9:30 AM

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