Normally there are four main factors in any risk management program which a board needs to consider and establish best practice processes around:
- A multiplier of reward to investment needs to be established based on a defined payback period. For example the longer the payback period the higher the risk as the original assumptions upon which the investment is based will be subject to greater variances in market place conditions as time becomes a factor.
- The investment and market damage numbers expressed as a percentage of company equity needs to be established. The higher the percentage the greater risk to the business.
- The intangible factors which are indentified as risks need to be clearly defined and given a value. For example reputational risk, client perception, competitor reaction, financial markets perception etc all have a risk factor which needs to be recognised.
- The final point is that the board need to ensure that they have a clearly defined monitoring program for each of the above individual risks which feed into the overall matrix associated with the program.
Once the first three aspects have had values of time, percentage, value or payback period established and approved by the board and the monitoring program with responsibilities and accountabilities clearly defined the overall program risk can be assessed and measured against the reward factors. In business every day is a risk but when a company embarks on a growth strategy the risk curve will always be greater than a business as usual approach. However if the risk reward curve is in balance and the monitoring system is unforgiving in its dedication and application the risk to some extent is mitigated. Remember, normally the size of the reward often matches the risk involved and it’s positively managing that risk that ensures the most positive reward is captured.