The four questions risk managers must ask themselves

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There are four key questions that risk managers must ask themselves if their organisation is to successfully adapt to today’s risk landscape, says PwC. How does your strategy fare on these four key fronts?

According to Dean Simone, PwC’s US risk assurance leader, the new global risk landscape requires senior executives to reconsider their attitudes and approaches to risk. In PwC’s report, Risk in review: Rethinking risk management for new market realities, he challenges risk managers to ask themselves the following four questions to find out whether their company is ready for the road ahead.

1. Is your board thinking beyond traditional risk frameworks and focusing on the right strategic risks?

According to Simone, too many boards focus on the “known” risks that tend to be identified in ERM systems. However, he claims that research indicates that companies have been most badly damaged or destroyed in the past by “unknown” risks.

To protect yourself from these “unknown risks”, Simone suggests thinking about vulnerabilities – rather than trying to predict risk events.

“What are the assumptions behind our strategy and business model – and what happens if those assumptions are blown off course by a major disturbance?” he asks.

2. Have you encouraged a risk-aware culture?

Is your risk culture rigid, and focused on compliance – as well as identifying, assessing, and prioritizing risks? This is an “anachronistic” model, suggests Simone, adding that risk aware cultures understand that risk is not just to be avoided, but often needs to be accepted and made a pivotal part of an organization’s business strategy.

He adds that a truly risk-aware culture sees risk management as a responsibility that should be shared across the organisation, rather than simply being the function of one department.

So how can you encourage the fostering of a risk-aware culture in your organisation? Simone suggests that rewards and incentives be offered for management that embrace the risk culture message. He adds that it’s important to create risk appetite statements that widely communicate the risks the company is willing to bear.

“With this new culture comes a new breed of risk manager: one who is strategic, collaborative, and able to think laterally,” says the PwC report.

3. Is risk management integrated across departments and functions?

The board must set a risk management framework that breaks down barriers between departments, as well as between different forms of operational, financial, and strategic risks. The PwC report introduces what is becoming something of a buzzword in risk management circles: holistic.

“A holistic approach to risk management will ensure that the full corporate team – including HR, IT, and other new guests at the table – has a hand in framing the risk agenda,” says the report. “It will also help align risk with business strategy, and support the successful execution of that strategy.”

4. Have you expanded your repertoire of risk and forecasting techniques to include innovative tools geared to today’s complexity, uncertainty, and velocity?

Sophisticated approaches, such as scenario modelling – which can show the impact of external shocks or new assumptions, calculate the accelerating change and magnitude of impact, and identify the catalytic effects – must  replace out-dated conventional forecasting approaches, says the report.

“A particularly effective way to understand “unknown” risks is reverse stress-testing. Unlike scenario analysis, which starts with a risk event, reverse stress-testing begins with an unfavourable outcome (e.g., corporate bankruptcy) and identifies circumstances that may cause the outcome,” it says.

Read the full report here.

Do you agree with this assessment of the risk management approach that today’s organisations must take? Have your say by commenting below.

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