Operating a business – particularly a profitable and growing business – has always included risks. Specific risks and perceived importance of those risks varies by industry, business type among other factors.
Volatility in today’s business environment, new risks tied to technology; industry-related risks; compensating business leaders based on risk taking; and the increase in regulatory compliance all create increased complexity. Therefore, risk management is increasing in scope, scale and prominence across organizations of all types and sizes.
Risk as a Component of Leader Compensation
There is considerable debate regarding the right amount and the types of risk business leaders need to take to achieve both company growth and protect stakeholder interests. Often top C-level officers’ compensation contains a component with incentives specific to the company’s financial performance. Sometimes questions arise when considering how the incentive of stock options based on company performance does – or could – induce a CEO to take risks that may not be in the best interest of the company long term, and/or may be outside the risk tolerance of the board.
Creating a perfectly aligned risk scenario within a compensation package has never been easy. Given increasing risks experienced by all organizations based on numerous factors, volatility and risks outside of the CEO’s (or the board’s) control, the task is even more complicated.
Risk and Return
One way to evaluate risk is in terms of potential return and the likelihood of that return given different risk levels. Weighing risks and probabilities against likely returns and probabilities provides leaders with the basis for making strategic decisions to create growth.
Transformative innovation – often required for atypical growth – always involves risk. Not every innovation initiative will be successful. Growth plans must include costs from failed initiatives. Incremental change is far less risky, but will not produce the rewards possible with transformative innovation that is on target.
Compensation packages aside, it’s often desirable for CEOs to have a personal stake in the organization they lead. Many factors go into CEO selection. An individual’s demonstrated risk appetite, risk tolerance, approach to managing and mitigating risks, along with their history of taking strategic risks, effectively managing risk over time and the ROI tied to business risks. Beyond intrinsic business risks, growth-focused company leaders must take calculated risks to achieve increased growth and profitability necessary to achieve business objectives.
In 2015 Accenture conducted multiple risk studies* across several industries. When considering risk management in multiple North American sectors there were multiple common findings:
- Digital is driving increased risk – with cyber risk expected to increase
- Risk analytics are currently not used sufficiently in day-to-day operations
- Appetite for risk related to innovation, product development and/or new alliances and partnerships is growing
The Role of Compliance
Companies are subject to various compliance requirements. Adhering to regulations or policies specific to achieving compliance is meant to decrease risk. However, unless a company has a culture of “doing the right thing,” policies become irrelevant.
In some companies the focus and energy spent on compliance are reactive. In the best companies leaders build strong relationships with their business partners, work to understand their partners’ businesses, and proactively incorporate compliance from the very beginning.
“Out of Alignment”** a survey of chief compliance officers, found 58% of respondents believe the compliance function is not integrated sufficiently into corporate decision-making and strategy. They believe insufficient staffing (22%) and a lack of management buy-in (16%) were most responsible for the lack of integration.
Little is certain in today’s global business environment. Successful leaders will focus on understanding risks, drivers and probabilities, and taking calculated risks when the potential for substantial return is sufficient.
- How well does your company culture communicate the importance of everyone in the company adhering to a code of always “doing the right thing”? Something this simple is far more memorable – and more likely to be acted upon – by employees daily than a complex statement. As well, reinforcing this cultural imperative by both walking the walk and talking the talk will greatly help imbed this practice among employees.
- Assess your process for when risk/reward evaluations are made. Ensure the evaluations apply not only to huge decisions, but are widely used to make decisions throughout the company. It may be desirable to share basic calculations for employees not accustomed to this type of decision-making tool.
- Are you complying because you must? If so, re-evaluate company compliance from the perspective of becoming proactive, ensuring compliance is on the table from the beginning when building third-party relationships, and when considering new initiatives.
*Accenture 2015 Global Risk Management Study
**DiPietro, Ben, “Out of Alignment”, a survey of chief compliance officers by Consero Group, The Wall Street Journal, February 12, 2016
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