Sometimes treating risk as an opportunity instead of a threat can be good practice.

What metrics, self-assessments, qualitative variables and stakeholder feedback are most useful both within ERM and when discussing with others in the company? This was one of the issues discussed at the May meeting of The NeuGroup’s Corporate ERM Group.

Many companies are required to disclose their risk-mitigation activities, particularly those that are financial in nature, so it’s easy to slip into using this disclosure as the measuring stick for program success. However, there are other ways to measure the benefits of risk management that are more immediate to a company’s well-being. One member walked the group through the process of “risk optimization,” measuring the positive side of risk as opposed to just the benefits of crises averted.

What can risk do for you? This member’s company measures its risk-management success on the resulting economic gains. Therefore, when it found situations where not enough economic risk was being taken, the ideology changed from pure risk management to risk optimization—finding the right amount of economic risk for a given transaction that allows the company to meet its financial goals, but maintaining enough discipline to not take on riskier endeavors than it could handle. This exercise involves a lot of margin analysis and focusing risk management on its ability to aid in growth.

Part of risk management’s job is to look at a given case, help the businesses build the upside and downside, determine key drivers in both directions, and build in flexibility and optionality for whatever decision is made. For this company having no surprises might mean not enough risk was taken. It could also mean that the company is not being innovative enough. There are opportunities not pursued because of the risk involved, but there are also ways to restructure some opportunities so that they can turn unprofitable economic risks into profitable ones. Another example of risk optimization for this company is in the maintenance of facilities that can produce many kinds of product. While there is a lot of investment and therefore a level of risk required to build this flexible capability, there is significant value in the resulting flexibility that gives the company a significant advantage and the ability to deal with a wide range of market scenarios.

In reaching for success in the area of ERM, many companies getting their employees to think like shareholders; that is, getting them invested in thinking about risk. At the presenting company, significant focus of the risk optimization team is to drive decisions that are consistent with the company’s risk philosophy. However, while risk optimization implies assessing economic risks for opportunities, there are certain risks that are unacceptable, especially compliance and environment health and safety risks that cannot be managed to an acceptable level. Even for an organization that focuses on optimizing risk, the ERM function has to get everyone on the same philosophical page.

There are opportunities to be had by getting people comfortable with a higher level of economic risk than they might be comfortable with if they applied their personal risk tolerance. But having a clear corporate risk appetite and making sure acceptable and unacceptable risks are understood by anyone who might be deciding to take them is critical to managing risk optimization. Many of the economic risks taken by private companies may be more challenging for publicly held companies, but if downside can be managed to an acceptable level, sometimes a risk is worth taking.