Risk management gains seat at CEO table

Corporate risk management, viewed largely as a means of crisis management in the wake of the 2008 global financial crisis, has moved up the corporate agenda as a key to competitive advantage, according to a new report by Accenture.  

The report, ‘Risk Management as a Source of Competitive Advantage and High Performance, Accenture 2011 Global Risk Management Study,’ is based on quantitative and qualitative research that was designed to measure and evaluate the progress companies have made since Accenture conducted a similar assessment in 2009.  

In the 2009 study, 85 per cent of the executives surveyed said their company’s risk management needed to be aligned with the company’s business strategy.   According to the new study, significant progress has apparently been made in closing that gap:  85 per cent of the 397 executives participating in the 2011 study said that risk, in fact, has become a driver of competitive advantage for their company.

Nearly half (49 per cent) of the respondents believe that corporate risk management will enhance the likelihood of long-term profitable growth for their company, and 48 per cent said it will support sustainable future profitability.       

Despite major investments to improve their risk management capabilities, the executives believe their companies still face critical exposure to risk.  They also believe the benefits of enhanced risk capabilities have yet to be realised.

More than half (52 per cent) of the respondents said their individual company has invested $25 million or more since 2009 to improve risk management capabilities, and one in 10 said their company’s investment has exceeded $ 250 million.

Despite these investments, 83 per cent said additional investments would be made in risk management in the next two years as companies navigate market volatility, manage increased complexity and address a proliferation of risks ranging from supply chain and other operational issues to new regulations, reputational concerns and increased threat from financial fraud and other cyber- based crime.

Additionally, more than 80 per cent of the executives said that the increasing volatility and complexity of the economic and financial environment have elevated the importance of risk management as a key management function.

As further evidence of the progress being made in elevating the importance of risk management as a corporate priority, 67 per cent of the respondents said their company currently has an enterprise risk management (ERM) program, and an additional 15 per cent said they have existing plans to implement an ERM program within the next two years.

The study also found that risk management is receiving great board visibility.  Nearly half (45 per cent) of the respondents said their company has a chief risk officer (CRO) today, up from only 33 per cent just two years ago.

Nearly one quarter (23 per cent) of the respondents also said their company’s chief executive officer (CEO) now owns the responsibility for risk management, up from 13 per cent two years ago.  And, perhaps most significantly, 79 per cent of the executives said the person responsible for risk management in their organisation reports directly to the CEO.

“The best companies are not just improving risk management; they are using it to gain competitive advantage as they integrate their risk function and include it in strategic planning for a more proactive approach to decision making,” said Steve Culp, Managing Director of the Accenture Risk Management consulting service line.

“As a result, new business opportunities are being pursued with a clearer view of the potential upside and downside, and executives are better able to engage in contingency planning to respond more effectively when risks become issues.”  

Even so, the study found that only about 10 per cent of the companies represented by the executives could be classified as “Risk Masters,” a term Accenture ascribes to organisations with advanced risk capabilities in areas considered to be of greatest significance to their organisation and their overall business strategy.  

According to Accenture, Risk Masters apply risk management capabilities more effectively across the enterprise to achieve competitive advantage and mitigate risk, and they proactively include their risk organisation in decision making across strategy, capital planning and performance management.

By generally wide margins, respondents whose companies were identified as “Masters” of risk management were significantly more likely to see the risk organisation as driving such important business benefits as operational, credit or market loss reductions (according to 74 per cent of “Masters” compared to 34 per cent of “Non Masters”) and infusing a risk culture into the organisation (69 per cent of “Masters” compared to 36 per cent of “Non Masters”).   

For all risk organisations, however, the survey indicates that the top five challenges in the next two years will include: reducing cost, aligning risk management with the company’s overall business strategy, responding to regulatory demands, improving risk measurement and improving modelling and data management.