To thrive in today’s constantly changing economy, risk-taking is critical, according to a recent survey of more than 152 C-suite executives conducted by Liberty Mutual Insurance and CFO Research. In the study, 62 percent of leaders said taking on significant strategic risk is necessary to stay competitive, while 68 percent saw managing risk as critical to hitting revenue targets.
Despite the importance of risk-taking, however, 41 percent of respondents admitted that their companies are not currently taking “necessary strategic risks to maximize business results.” What obstacles are standing in the way, and how can leaders overcome them? In this article, we’ll walk through the survey findings, identifying internal challenges and exploring three steps that CFOs can take to empower their organizations to take strategic risks.
1. Build a Risk-Aware Culture
According to survey respondents, there are two major obstacles preventing their companies from effective risk management:
- A higher priority being placed on other business initiatives; and
- Risk awareness not being emphasized as part of the corporate culture.
It’s important to note that in many companies, these two obstacles are likely codependent; that is, if your corporate culture does not support risk-taking, then risk-taking is likely to always fall lower on the priority list, and vice versa.
“In the study, 62 percent of executives said that taking on significant strategic risk is necessary to stay competitive, while 68 percent saw managing risk as critical to hitting revenue targets.”
CFOs who want their companies to be able to make strategic risks, then, should take active steps toward fostering a culture that encourages smart risk-taking – that is, one that’s focused on making forward-looking decisions to create sustainable and profitable growth versus simply protecting against downside losses and operational risks.
What can CFOs do to build this positive culture of risk-taking? Those with a sharp focus in the following areas can better position their companies and encourage positive risk-taking cultures:
- Building a strong degree of support from the board and the C-suite.
- Having a dedicated individual or team responsible for viewing risk management holistically and creating a consistent approach across the organization.
- Encouraging collaboration across teams, from management and field staff to legal, compliance, and IT to identify, quantify, and mitigate potential risks that come with strategic decisions.
2. Encourage Forward-Thinking Risk Analysis
Strategic risk is easier to take on when you have researched and planned for variable outcomes – but most companies are not doing so. In fact, the Liberty Mutual-CFO survey found that more than half of companies (52 percent) report that they seldom project “best case,” “likely case,” and “worst case” scenarios for the strategic risks that they do take, while only 15 percent of respondents reported always performing this type of risk analysis.
The danger of not conducting such outcome analyses is that companies may identify risks only after they have adversely impacted the bottom line – putting them in the position of operating defensively, rather than strategically. Integrating risk management and outcome analysis into all routine management processes of a company, including capital allocation, controlling, planning, and reporting, can help to proactively identify and plan for risks before they happen.
“Strategic risk is easier to take on when you have researched and planned for variable outcomes – but most companies are not doing so.”
While this integration should be done collaboratively to win buy-in at all levels of the organization, change must start at the top, as noted above in step 1. The C-suite must set an expectation that the entire organization should regularly consider, and plan for, issues of risk and uncertainty. Then, the goal should be to engage and cooperate on strategic decisions – encouraging a companywide type of risk/return decision-making that’s applied consistently.
3. Leverage Insurance to Transfer Risk
For finance executives, insurance plays a critical role in being able to take on more strategic risk. The Liberty Mutual-CFO survey found that more than four in ten (42 percent) respondents rely on their insurance program to manage the majority of organizational risk (between 50 and 100 percent), while one-third (34 percent) use insurance to manage between 25 and 50 percent of all risk. In addition, 68 percent reported that having the right insurance program reduces volatility in company earnings and boosts overall corporate value.
Simply put, a deliberate and disciplined insurance program helps protects your organization from financial loss by transferring some risk to a third party. In addition to providing peace of mind, this allows your company to make decisions from a place of power, knowing that there is a plan in place to help protect against possible losses. It’s also why a CFO must dedicate time and resources to creating a robust insurance program that helps cover a business’s unique threats. By partnering with an insurance broker and carrier with strong backgrounds in your industry, you can better protect your company against potential risks that might come with operational and financial business decisions.
An Economy of Constant Change
In today’s digital, sharing, and increasingly global economy, it’s impossible to accurately predict where the next industry disruptor will come from. However, it’s very likely that the rate of change will intensify in the future. Staying competitive in this environment means positioning your business to be able to take on strategic risk. Every CFO needs to ask themselves: is my company ready?
For more information on risk management and further results from this survey, review our infographic, Strategic Risk Taking: How Insurance Helps Businesses Stay Agile.