A Leader's Guide to Strategic Risk Management

Abstract

Purpose: Many firms did not have mechanisms in place prior to 2007 to identify and track the weak signals of an impending financial crisis, and as a result they were not prepared for the stresses and opportunities the crisis generated. This paper offers a solution for identifying the weak signals of developing ambiguous threats and a methodology for economically managing the risk of enterprise-threatening loss.

Design/methodology/approach: This paper is a guide to strategic risk management (SRM), which is a process of identifying, assessing and economically managing potentially enterprise-threatening losses. Specifically, it is a way to mitigate developing ambiguous threats before they manifest and potentially threaten the viability of a going-concern.

Findings: Corporate leaders can follow the example of savvy value investors who use risk management insights to economically manage the effects of developing ambiguous threats (such as financial crises) and then position their firms to profit from select risks if they manifest.

Practical implications: Market pressures can cause firms to loosen product, strategic and/or investment standards incrementally, which over time can radically change a business model's risk profile without anyone noticing and acting to mitigate it.

Originality/value: This guide to SRM provides insights into how corporate leaders can identify the "weak signals" of a developing ambiguous threat before the risk of loss manifests. It also describes how executives can economically manage the risk of loss in their portfolios, which includes opportunistic investments and/or hedges at favorable price levels.

Keywords: Strategic Risk Management, Ambiguous Threats, Threat Development, Hedging

JEL Classification: D81, L21, M10