Thinking About The Upside of Risk
Making intelligent and informed decisions is intrinsic to effective risk management. Many times risk management decisions are centered around loss events and the negative consequences that might eventuate. The positive aspects of risk taking are hardly noticeable.
Let’s take as an example, a decision by a local-based company to build a sales and distribution presence in a new international market. Some of the risks associated with pursuing such a move include:
- Regulatory changes. Regulatory or unanticipated government intervention aimed at foreign players can upset the best of plans.
- Currency volatility. Shifts in foreign currency values have both positive and negative implications on the company’s costing and selling prices, and ultimately profitability.
- Political Uncertainty. Increased political tensions between countries often lead to trade wars, supply chain disruptions and minimal trade opportunities.
- Heightened Corruption. Companies entering certain markets may be confronted with unorthodox ways of doing business. In a number of countries, bribery is required in order to complete trade.
On the other hand, the opportunities of expanding into the new market include:
- The business is able to keep pace with competitors by pursuing an international business strategy.
- You create the opportunity to serve more customers. A larger consumer market ultimately means enhanced profit margins.
- Exploring new markets can lead to innovation through external partnerships.
- Market diversification. Having a presence in more than one market also spreads risk as the business is not completely reliant on one market.
In spite of the opportunities lingering on the horizon, the tendency for decision makers is to fixate on the negative side of risks.
Rather than identify and exploit the upside of risk for value creation, decision makers resort to singing the default anthem ‘No, no, no. It’s too risky.’
Risk taking is strictly eschewed or mitigated – always from the downside. Given today’s surging economic uncertainty and volatility, and the integral role of effective risk management in driving business performance, an unreserved mindset change is necessary.
It’s not about eliminating or even terminating risk as risk will always be present. It’s about mastering what might happen, considering all the potential opportunities, including the potential risks, evaluating whether this is acceptable and then acting as required to effectively pursue set business objectives.
Therefore, instead of always being risk averse, decision makers should start thinking about the upside of risk and develop an understanding that there is a benefit to taking on more risk, provided this is done in a controlled way and not higgledy-piggledy.
As a strategic advisor to the business, the CFO can play a critical role in helping management make better informed decisions about uncertainties.
We can achieve this through:
- taking initiative and integrating ourselves in operational and strategic performance discussions,
- understanding the business and its entire operations, and
- asking smart questions aimed at helping our colleagues more effectively identify opportunities and the risks that accompany them.
Doing so empowers us to provide decision makers with cogent advice that ensures they have solid information about both the upside and downside of the company’s business strategy, and ultimately help them make enlightened decisions.
In other words, the advice we allot to decision makers should not act as an impediment to the achievement of business objectives. Alternatively, it should help them understand the odds of achieving the objectives and business success.
Effective risk management far exceeds risk protection and compliance, loss avoidance or arranging insurance cover to mitigate negative consequences.
Old habits die hard. Nevertheless, growth and progress ensue from challenging the status quo and embracing new habits. Stop paying attention on avoiding loss and start taking a broad, strategic view on the upside and downside of risk.
Not a member-scholar yet? Join our financial community here!
Identify your path to CFO success by taking our CFO Readiness Assessmentᵀᴹ.
For the most up to date and relevant accounting, finance, treasury and leadership headlines all in one place subscribe to The Balanced Digest.