The Hidden Danger of Shallow Risk Management

In a recent study, 92% of CEO's agreed that information about risk is vital to long-range success. Only 23% of the CEO's said that they have robust information as to the risks that threaten their businesses. With so much at stake why are so many companies failing to manage the risks to their success and what to do about it?

Too many organizations insurance is the primary mechanism for risk management. With the cheapest cost, often being the driver around what coverage to purchase, the overall conversation about risk management often becomes neglected.

For example: Let’s say a manufacturing firm purchases insurance on their equipment in case of damage. The organization may even go further to purchase business interruption coverage in case of a breakdown of the equipment. The organization may consider that the risk around the equipment is now covered.

An examination of risk management makes clear that CEOs are correct to be concerned about risk management.   

The first risk concerns the upstream supply chain. The company purchases coverage to cover against the breakdown of the equipment, but what happens if the supplier’s equipment breaks down?  What are the implications the supplier’s failure to deliver products and services on time, in full and with quality? Does the company have an operational plan in place to source the supplies elsewhere or even purchase inventory from a competitor? Defining risks and planning alternatives before the crisis strikes are vital for any company to thrive over the long term.

The second risk that is often overlooked is the core function of the company itself starting with the human capital behind the equipment. What happens to the profitability of the company if the VP of Operations in charge of overseeing all the equipment is recruited by a competitor? All in intellectual capital and integrate know-how would be instantly lost with catastrophic implications.

The third area of risk is downstream conditions and events.  A vast array of conditions pose risk from the disruption of distribution to unanticipated regulatory changes, to competitor innovation, to loss of sales outlets to natural disaster and so much more.

Risk management that relies on insurance covers a small portion of all the elements that threaten success. Proper risk management planning that goes beyond the shopping of the cheapest insurance coverage is vital for any organization.  Companies with long-term success are those that create an ongoing, comprehensive risk management plan that identifies risk, plans mitigation strategies and remains alert for early warning signs.

The concern of CEOs for risk management should be addressed through comprehensive assessment and planning.  Long-term success is the positive outcome for companies that are insured by their rigorous and ongoing assessment of risk.

-- Steffen Nass, CHFC | VP of Digital Innovation

 

 

 

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. Any example provided in the article is hypothetical and is for illustrative purposes only. There is no guarantee that similar results can be achieved and past results are not indicative of future results. All investments involve varying levels and types of risks. These risks can be associated with the specific investment, or with the marketplace as a whole. Loss of principal is possible.