Positive Risk Management Culture Is a Strategic Imperative
Knowing when to take the right risks can drive the strategy and growth of a business.
Corporate culture is a shared set of corporate mission, values, attitudes, standards and behaviors that determines how employees and management interact to help drive business strategy and results. It reflects both written and unwritten rules. It is most successful in helping achieve sustainable growth and positive business results when the desired corporate culture starts with the board and is championed by the CEO and leadership team, integrated into the company's goals, performance objectives, metrics, and employee performance management and compensation systems.
Susan Holliday
The most innovative, continuously growing, and future-focused companies have well-defined and well-understood corporate cultures. These companies encourage and reward open-minded thinking, constructive challenge, collaboration and innovative approaches to business development. As Mark Parker, then-CEO of Nike, stated, “We have a culture where we are incredibly self-critical; we don't get comfortable with our success.” This mindset is a key driver behind Nike’s success.
For a corporate culture to support sustainable growth, leadership must proactively consider and understand internal and external challenges. These challenges and risks can either inhibit business success or present new opportunities. Embracing risk management as part of the culture, governance and practices of a company involves encouraging boards and management teams to proactively anticipate and discuss the positive and negative impacts that risks can have on their businesses. As Warren Buffett once said, “Risk comes from not knowing what you are doing”
Ursuline Foley
The DCRO Institute defines “risk” as “uncertainty”. Hence, risk is not inherently good or bad. Companies and their shareholders need to take risk to earn returns. Boards and management need to establish not just a risk culture, but a positive risk culture. Companies that embrace a positive risk culture are more likely to increase their business success by encouraging more open discussions of risk at all levels in the company to surface more business opportunities.
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The board has a critical role to play in helping to foster a positive risk mindset with management and throughout overall company culture. Directors with risk management experience are better equipped to have the appropriate oversight of enterprise risk management and will be able to assess whether corporate culture is embracing a positive risk management mindset, proactively managing risk and always considering business opportunities.
How a Positive Risk-Taking Company Culture Can Drive Business Strategy and Growth
In the food industry, almond cultivation is water-intensive and hence highly vulnerable to drought conditions and water restrictions, making it less predictable, more difficult and more costly to grow almonds. In the meantime, consumer interest is growing in alternatives to milk. In response, a vegan food company saw an opportunity to develop sesame “milk,” which requires much less water and is higher in protein. This innovation involved new ways of thinking about sustainability, fulfilling consumer needs while mitigating some of the risks of increased costs and environmental impact.
Another example relates to corporate investment in start-up companies. We live in a digital and innovative era, resulting in billions of dollars of investments annually spent funding portfolios of innovative start-up companies for almost every industry and function (e.g., fintech, insurtech, edtech). Start-up companies are inherently risky since they usually do not produce a profit for a few years (assuming they even survive); however, they can provide significant innovation and agility. Yet, many corporations will invest in start-ups to access business and technology innovations for their business. At times, they will acquire the start-up. Some companies have established an internal venture unit to focus on investing in start-ups, enabling them to quickly learn and adopt new technologies and business models, regardless of the inherent risks. Despite the riskier nature of start-ups, when managed appropriately, they can provide innovative solutions to help accelerate business change due to their more agile and innovative culture. Start-up investment is not a guarantee of success. However, corporations are prepared to look at the upside risk and recognize the need to challenge the status quo given the higher demands from customers and shareholders. This is an example of deploying capital with a positive risk mindset to start-up companies for the benefit of leveraging innovation to quickly advance the operations, business, strategy and returns of a corporation.
Another example where a positive risk approach needs to be applied is AI, which is certainly a current hot topic, one that presents a classic risk dilemma. Boards may be worried by the black box nature of the algorithms, potential biases and increased cyber risk, which are all valid concerns. On the other hand, ignoring new technologies is also a risk. For example, AI may already be in use by suppliers, vendors or even employees without appropriate oversight and governance. Additionally, competitors embracing AI could gain an advantage. Hence, the board can take a positive risk mindset toward AI by encouraging company-wide AI education and embracing an AI governance framework with appropriate checks and controls. Those controls could include an auditable permission process to use AI, oversight on suppliers' and vendors' use of AI, and controlled business pilot projects to prove AI business advantages. AI can provide a benefit in risk management itself, such as identifying fraud or cyber breaches and horizon-scanning for emerging risks.
Embracing risk is vital to corporate success and the delivery of shareholder value. Risk is “uncertainty.” It is not inherently good or bad.
Successful companies see risk management as a core competency that is embedded in the fabric of the organization and culture. This means having risk expertise on the board, in addition to having enterprise risk management skills and disciplines embedded in the organization. Risk management can be a key differentiator in the growth and success of a company.
The pace of change and the degree of uncertainty in the world is an opportunity for companies brave and smart enough to approach risk positively and govern it effectively, which should ultimately provide greater strategic success and growth.