Risk Assessment: An essential tool for better decision-making

By Tunku Alina and Anita Menon

How familiar to you is the following scenario?

It’s the start of the year, and the board has been booked for a strategy day. Slides decks have been shared but they were obviously rushed with many changes leading right up to the hour of the CEO’s briefing. Inevitably, an indepth description of the year ahead as part of a rolling 3-year midterm strategy, or a totally fresh 3-year plan is trotted out. The CEO gives an overview of the past year, high level aspirations for the coming year, and then the individual business heads would present their parts. There would be a passing comment on market and competitive landscape.

Other than in the financial services sector, the Chief Risk Officer is rarely included. I have many times asked why the Risk Officer is not invited, or no formal risk assessment of the strategy or annual plan is given but it seems that this falls on deaf ears. I got my answer once, outside during an informal lunch with the board and the CEO – “we don’t want to be unnecessarily looking for things hiding behind corners to frighten us and impede business”. On so, there it is – many Malaysian CEOs look at risk assessment superstitiously, and shudder at inviting the bogeyman into the room by mentioning the word “risk”.

I asked Anita Menon, whom I have had the privilege of mentoring to this year, to share her thoughts from management’s perspective. She is a Chief Risk Officer and comes from the financial services industry. She has kindly shared the following.

A Risk assessment would provide a comprehensive view on the unintended consequences arising from a plan that Management or Board may miss. Examples are when targets are aggressive which may result in the organization becoming overly focused on short-term gains. This myopic view might lead to neglecting long-term sustainability and strategic alignment. Risk assessments help identify this potential pitfall. By evaluating the balance between short-term gains and long-term viability, the Board can make informed decisions. By assessing risks comprehensively, the Board can adjust the strategy, recalibrate targets, or allocate resources appropriately.

Risk assessment for strategy is critical for organizations aiming to navigate the complex landscape of uncertainties and achieve their goals. Let’s delve into why it’s so crucial:

1. Holistic View of Risks:

o Risk assessments provide the Board with a holistic perspective on the risks associated with the strategic plan. These risks encompass various dimensions, including derailers, unexpected scenarios, and even those elusive black swan events.

o Beyond external risks, it also considers internal factors that could jeopardize the plan’s success. These factors include (but not limited to) the loss of key talent, key leaders, systems availability and any event impacting business continuity, and the departure of strategic partners who play a pivotal role in executing the strategy.

2. Strategic Decision-Making:

o A well-structured risk assessment process empowers the Board to make informed decisions. By evaluating risks systematically, they can allocate resources effectively and prioritize risk management efforts.

o Severity assessment helps identify critical risks, allowing the Board to focus on mitigating those that could significantly impact the plan’s execution.

3. Resilience and Adaptability:

o Organizations face a dynamic environment where risks constantly evolve. A continuous risk assessment process ensures that new risks are promptly identified and addressed.

o Armed with data from risk assessments, the Board can adapt their strategies, making them more resilient in the face of uncertainties.

4. Safeguarding Success:

o Risk assessment isn’t a one-time event; it’s an ongoing practice. By integrating it into day-to-day operations, organizations safeguard their success.

o The structured framework enables proactive risk management, reducing vulnerability and enhancing the likelihood of achieving strategic objectives.

So there it is. I tend to agree with Anita that shining a light into the dark of unknowns ahead of you, is better than groping around , borne solely by collective experience of the past, faith and expectations. I hope that we’ve made a good argument why risk assessment is essential to the toolbox for better governance.