what keeps leaders awake

It was a pleasure to be acknowledged as a contributor to an excellent paper appearing in the UK’s widely read “Governance” magazine, March 2015 Issue 249.1 In their article entitled “Risk Oversight”, esteemed colleagues Ghislain Giroux Dufort (of Baldwin Consulting) and Denis Lavoie (of VIA Rail) address how executives and directors of organizations can monitor key strategic risks, arming them to prioritize the most urgent situations which require immediate attention. With this methodology in place, leaders are bound to sleep better knowing in near real-time the status of the most troubling situations which could potentially derail their top organizational objectives.

Using an example of the risk of rising and dropping gas prices for trucking companies and whether risk management hedging strategies should be adopted, Giroux Dufort and Lavoie open their discussion with a simple model showing a measurable set of parameters, i.e. if gas prices rise, profit drops etc. In this example, two different companies philosophically juggle whether to: a) gamble and assume a potential risk (swings in gas prices) or; b) play it safe and focus on the trucking business, hedging their gains and losses. Each day, as gas prices fluctuate, the two companies can easily monitor their rising or dropping profitability by inputting the current fuel cost. Whether or not either strategy is “right” is academic-the writers wish to illustrate how a risk can be measurable and easy to monitor.

More realistic for most corporate leaders, is that their top risks are not easily measurable. Envision the difficulty of monitoring the status of the following risks: “Losing key members of the Executive”; “Key Supplier Failure”; “Rising Interest Rates”; “Failure to Grow Organically”; and “Poor employee Morale”. In their article, Giroux Dufort and Lavoie present a set of tools, including their “Risk Dashboard”, all of which provide leaders with “…simple, visual, yet rigorous means to ensure their organisation focuses on its key strategic risks, anticipating changes in them and monitoring their evolution on a quarterly basis”. Such tools require the creation of barometers devised to measure the status of various factors that provide insight into the pending occurrence of risks. These barometers are commonly referred to as KRI’s (Key Risk Indicators), and can be used for any kind of organizational risk which might prevent the achievement of corporate objectives. For example, an accounting firm wishing to protect against the risk of “Audit Errors” may wish to monitor the status of completion of professional standards training by auditors, using the percent of auditors annually certified as a KRI. To combat the “Risk of Collisions” at a railroad operation, a KRI could be the quarterly completion rate of drivers training programs for a team of locomotive engineers. An insurance underwriting firm may wish to protect against the risk of “Losing Key Executives” and may wish to measure senior employee job satisfaction. A quantitative approach using thoughtful KRI’s provides confidence to top leadership that they’ll be made aware when things are going wrong, allowing for prioritized and focussed action when needed.

Once KRI’s are created, using tools such as the “Key Strategic Risk Dashboard” as devised by Giroux Dufort and Lavoie, corporate leaders can easily oversee the status of multiple risks simultaneously, being prepared to act on those risks trending negatively.

Summary:
Why adopt a system which produces a dashboard for monitoring key risks? There are several compelling reasons:

  1. Response time– leaders generally understand that they owe a duty to stakeholders to protect the company and its constituents, however often companies are not equipped to respond in near “real-time”, when risk conditions deteriorate;
  2. Allocating scarce $ Resources– every risk cannot be mitigated, but the serious ones should be. To prioritize spending, leaders need a methodology to track trends so that important situations are overseen and managed;
  3. Best Practices– leaders are expected to be exercising reasonable diligence in risk management, with utilization of readily available tools;
  4. Board Charters– most organizations have board charters which mandate the responsibility by boards to oversee the principal business risks of the organization.

Monitoring key risks on a regular basis requires proper processes, administered by trained staff, within a culture which values sound risk management. Properly set up, risk monitoring can provide invaluable information which allows organizations to keep one eye on troubling situations, while steering ahead to capitalize on opportunities and reach objectives.

Read Article: Risk Watch – Board Risk Oversight – Baldwin GGD FINAL PostPublication 2015-04-23

Footnote:

  1. Article entitled “Risk Oversight”, from Governance magazine, March 2015 Issue 249, authors Ghislain Giroux Dufort (Baldwin Consulting) and Denis Lavoie (VIA Rail).