Corporate Risk Aversion Stifling Growth

ARLINGTON, Va., Oct. 13, 2014 /PRNewswire/ -- Companies that embrace strategic risk taking and make smart risk decisions can realize twice the amount of growth compared to peers that manage risk more traditionally, according to new research from CEB (NYSE: CEB), the leading member-based advisory company. However, CEB's latest Executive Guidance suggests that very few companies have figured out how to leverage risk to their benefit. Sixty percent of corporate strategists characterize their companies' decision-making as slow – particularly for difficult and risky decisions – and those same executives believe that their current growth rates could be almost double if inaction were not a problem.

Companies without good risk management practices often make poor risk bets, such as an ill-timed acquisition or failed product launch. These missteps ultimately hurt a company's bottom line, its brand and even its ability to operate. In fact, 86 percent of market capitalization declines over the last decade were caused by risks that were strategic in nature – not operational, legal or financial.

The "flip side" is also true, with excessive focus on risk prevention and overly formalized risk management processes leading to a type of risk aversion that CEB calls "organizational drag" – a complexity that slows decision-making and execution.

"Slow decision-making around risk taking is the critical barrier to growth," said Sampriti Ganguli, executive director, CEB. "As growth is hard to realize and uncertainty remains prevalent, many business leaders have become either too risk averse, causing decision paralysis, or too risk prone, cutting corners and prioritizing short-term gains over longer-term success. Instead of focusing on one extreme or the other, executives need to have the courage to take the right kinds of risk in order to adapt to the changing business environment and maintain competitive advantage."

To navigate today's risk landscape, leading companies focus on taking the right strategic risks, simplifying their risk responsibilities and making human judgment and behaviors a risk priority.

"Risk management should not be conducted separately from strategy, business processes and talent management, but rather be deeply embedded in all three activities in order for companies to truly realize their potential growth opportunities," added Ganguli.

CEB has identified three standout practices companies should follow to improve risk management:

• Find the Risk vs. Reward Balance – Companies need to align corporate strategy and risk processes to help remove biases in the planning process and improve confidence in strategic decisions. To avoid risk aversion as well as poor risk decision-making, companies must establish a healthy risk appetite by clarifying the acceptable level of risk and holding decision makers to that standard.
• Streamline Risk Processes – Risk management must improve how risk information is collected and shared to streamline decision-making and open lines of communication to all employees. This helps reduce repetitive reporting burdens and improve how risk is valued within the organization.
• Make Employees the First Line of Defense – Management teams need to anticipate and manage the root cause of most risks – human behavior and judgment – and work to establish a culture of integrity. This involves screening new hires for risk indicators, teaching principles on acceptable risk taking and targeting compliance training at high-risk employee segments.

To learn more, download the Q3 2014 Executive Guidance or visit CEB.

About CEB
CEB, the leading member-based advisory company, equips more than 10,000 organizations around the globe with insights, tools and actionable solutions to transform enterprise performance. By combining advanced research and analytics with best practices from member companies, CEB helps leaders realize outsized returns by more effectively managing talent, information, customers and risk. Member companies include approximately 85% of the Fortune 500, half the Dow Jones Asian Titans, and nearly 85% of the FTSE 100. More at cebglobal.com. 

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SOURCE CEB