Every CFO faces different challenges when it comes to risk management. There is no one-size-fits-all approach that works for all companies; rather, risk management must take into consideration the size of the company, its culture, and the industry of which it is a part. A company’s level of risk aversion also plays a key role in its approach to risk management, meaning that even companies that are similarly sized and situated may handle risk management plans very differently.
To build an effective risk management plan for your organization, consider the following tips:
- “Right-size” your risk management plan. When it comes to risk management, a more complex, sophisticated plan is not always a better one. Instead of adopting a risk management plan from another source, focus specifically on what your organization needs and create a risk management plan that meets those goals.
- Create a culture that identifies current and emerging risks fearlessly. Bolster communication throughout the organization and encourage employees on the front lines to report on and consider both current and emerging risks. Open communication is key to accurately identifying risks, gathering sufficient information to address them, and executing an effective risk management plan.
- Treat risk as a challenge, not a source of fear. Cultivate a company culture that treats risk not as something to be feared, but as a challenge that creates opportunity if it is met and managed effectively. Fear increases aversion to risk; openness to opportunity increases awareness of risk and willingness to meet it head-on when it appears.
- Develop a system that rewards effective risk management. Offering compensation or bonuses for reaching risk-management benchmarks and building in penalties for increasing revenue by increasing volatility encourage employees to move toward effective risk management and away from unacceptable risks – improving the application of the risk management plan.
- Encourage transparency. Just as communication about current and emerging risks is key, so is communication when problems arise. Foster a culture in which employees feel safe bringing up problems when they are identified so that they can be addressed promptly.
- Build flexibility into the risk management plan, allowing the organization to respond nimbly to changes or present risks.
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