INTEGRATING RISKS INTO STRATEGIC DECISION MAKING
Integrating risks into strategic decision making is both rewarding and challenging. With a robust, scalable architecture and integrated analytic platform, firms can overcome the challenges and achieve a dynamic integration of risk and finance for maximum return.
Strategic decision making under uncertainty
Firms make decisions continuously regardless of substantial uncertainty. Risk is the potential financial loss a firm can incur. Risk management is the art of mitigating potential losses while managing a going concern and maximising risk-adjusted returns. Historically and traditionally, enterprise risk management (ERM) was considered primarily for compliance management and protecting the value of the enterprise.
The global financial crisis uncovered the gap between the risks that financial institutions (FIs) took and what their boards of directors perceived to be taking. The gap implies that the top risks that impact strategic objectives are not properly accounted for. To address this gap, organisations should pivot to a more quantitative way of identifying and measuring key risk indicators (KRIs). Analysis of KRIs and their relationship to other financial metrics can reduce business volatility and enhance financial performance. It also helps balance trade-offs between short- and long-term earnings of the company.
Therefore, ERM should create value by integrating with business performance metrics. To drive this value creation, it is critical for FIs to understand and analyse the ever-changing, dynamic relationship among strategic goals, value drivers, and risk factors such as credit, market or macroeconomic risks. With careful expansion and the leveraging of their ERM assets, a firm can make risk-informed business decisions by incorporating risk measures into strategic business and financial planning. When making financial decisions, a chief financial officer (CFO) may consider many financial factors including balance sheet, income statement, cashflows, profitability, customer lifetime profitability, and so on.
Jan-Mar 2023 Issue
SAS