Develop a Risk Management Culture – June 2014

This topic concerns internal control.

Managing and measuring risk is a key element in running a successful business.  The CFO plays a key role in the process  Most often identifying, measuring, and managing risk is a top down effort.  In recent years, however, many companies have realized that the business has a very valuable perspective that is not obvious to those at the top of the organization.  This perspective incorporates input from department leaders and gives them responsibility for the risk management process.  While this approach started with larger businesses it is equally applicable to small, multi-department enterprises, that are on the cusp of significant growth.

To implement this risk management process, a series of meetings can be organized whereby the applicable risk management process is established.  The goal of the process is to get more employees conversant about risk.  Often this will lead to certain employees owning the concept of risk management and selling the concept to other employees.  Obvious success in one department can frequently duplicated for other departments.

Developing the risk management entails a multi-step process preceded by a measure of the firm’s risk culture.  To measure this culture the CFO should:

  1. Ensure employees are comfortable with their ability to identify and assess risk
  2. Provide a common framework and terms within which employees can identify, measure, and evaluate risks and controls in their part of the business.
  3. Establish that employees can periodically identify risks and communicate them to their leader.
  4. Create an open atmosphere to encourage an open and collaborative discussion of risk.

Once this is accomplished, the risk management process can begin.  It is best structured as a five step process as follows:

  1. Gain buy in from department leaders
  2. Get department leaders to share their perspective on risk
  3. Educate employees on types of risks that are important to executive management.
  4. Through conversations with employees, identify and prioritize risks their department faces.
  5. Formulate and implement the internal controls necessary to measure and manage the risks.

Completion of step 5 will help provide the company with the ability to effectively and profitability capitalize on growth opportunities.

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