Appropriate risk management is crucial for effective strategic leadership

Organisations cannot exploit strategic opportunities nor can they protect themselves from potential losses or failures, without a clear steer from the top on appropriate risk taking, says ACCA (Association of Chartered Certified Accountants).

Company boards are closely connected to effective risk management. Risk assessment, reporting and control help to enhance a board’s governance and control policies, keeping organisations aligned with their objectives.

ACCA’s research highlights the key challenges boards face when performing their roles, but also shines a light on current good practices across both smaller and larger organisations.

Key findings from the report include the following:

  • Some organisations are increasingly aware of the strategic benefits of risk management, which helps them to exploit opportunities and exceed their objectives;
  • Diversity enables boards to expand their skills and experience in risk; thus making them more effective collectively;
  • Boards find it hard to understand and address risk culture within an organisation, due to a lack of guidance and difficulty in connecting culture to organisational performance;
  • Time constraints at board meetings and overly detailed risk reports can distract boards from looking at the bigger strategic picture.

Risk and the strategic role of leadership

In an increasingly complex world, what is the role expected of leaders in managing risk? How can they maximise the opportunities as well as protect their organisation?

Figure showing the two distinctive approaches to risk management at the leadership level

A spectrum of practices

Board-level conversations and practices in relation to strategy and risk management take place along a spectrum, with many boards being nearer to one end of the spectrum or the other.

The extremes of the spectrum can be characterised as:

  • The Principled approach, where discussions about risk are more likely to focus on the exploitation of upsides and opportunities, and connect strategy and risk in an implicit and unstructured way, but potentially leading to inconsistent risk management decisions
  • The Prescriptive approach, where risk-management activities are much more formalised and consistent, but a high degree of focus on internal control may mean that strategic opportunities are missed.

Board diversity drives ‘risk intelligence’

Diversity (in its broadest sense) enables the board to understand the ‘risk-reward equation’ better. This diversity can be summarised as Risk Intelligence, Skills, Knowledge, Experience, Education, and Training (RI-SKeet). The enrichment and enhancement of strategic decision making brought about through RI-SKeet ensures a balanced collective board intelligence that is, allowing it to explore fully the dynamics of the risk–reward equation.

Risk Intelligence, Skills, Knowledge, Experience, Education, and Training (RI-SKeet)

Reducing barriers

The process of making risk more visible to the board is fraught with difficulties as there are multiple barriers that inhibit this from occurring.

These barriers fall within two categories; ‘cognitive impediments’, which reduce a board’s ability to make risk-sensitive strategic decisions, and ‘social obstructions’, which suppress risk-relevant dialogue in the boardroom.

Ver: Risk and the strategic role of leadership

Source: ACCA

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