Magazine article Risk Management

How Risk Management Can Enable Growth

Magazine article Risk Management

How Risk Management Can Enable Growth

Article excerpt

Traditionally, finance and strategy teams have been tasked with working together to promote corporate growth. Now, new research suggests they need to enlist a third partner-risk management-to achieve sustainable long-term growth.

A study conducted by CEB (now Gartner) of the Fortune 1000 and S&P Euro 350, found that just 60 companies have consistently outgrown their industry peers while simultaneously making margin improvements over the last 20 years. The biggest differentiator of these "efficient growth" companies was their ability to allocate capital to bigger, riskier bets. For example, their R&D portfolios were disproportionately slanted toward transformational innovation, their M&A deals were 40% larger on average as a percent of revenue, and they were quicker to reintroduce capital expenditure through the cycle. These riskier bets allowed them to become the "first-movers" in their industry while not spending any more on R&D or acquisitions than others.

But taking such risks does not come naturally for most companies. In fact, in 2016, 77% of CFOs reported that the amount of risk aversion from executives in their organization rose from the previous year. What these executives do not understand is that, like cholesterol, there are good and bad kinds of risk. Bad risks are more obvious and distinguished by recklessness and wrongdoing. These are what the risk management function is normally associated with-putting controls in place to keep bad things from happening. But companies need to take risks to grow, and there is a role for risk management to play in helping with that.

There is also a real benefit to using the enterprise risk management (ERM) program to combat risk aversion. In fact, the CEB study found that the companies that are best at taking smart, riskier bets to grow generate a total shareholder return premium of 7% over their industry peers.

To get this right, finance, strategy and risk management teams need to join forces. This presents risk management with an opportunity to demonstrate its value by enabling senior leaders to make high-risk growth decisions. Risk leaders can help companies change their approach to new growth opportunities by taking three key steps:

i.Coordinate risk and strategic planning. At most organizations, risk management is not involved in strategic planning conversations. …

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