I started rock climbing on Table Mountain as a student.  There is something compelling about moving from hold to hold, high up on a rock face.  It is about confidence, poise and pushing the limits.  To be sure there were tense times.  I used to climb with someone who was prone to go off route.  Now and again I found myself dangling from fingers that slowly opened till I fell.  But here is something I like about traditional rock climbing.  We climbed with ropes and all manner of chocks, bongs, slings and ‘friends’ (camming devices).  We could follow interesting routes, make bold moves and enjoy the camaraderie knowing that we were acceptably safe.

The illustration for business is clear isn’t it?  Executing strategy can be exciting.  Engaging with suppliers, partners and clients in bold, risky but carefully considered moves is the ‘stuff of life’.

But where is your safety kit?  How do you protect your shareholders from risk in your bold moves?

Managing Corporate Risk

Kaplan and Norton deal with Risk as part of the Operations Theme in the Internal Process Perspective of Strategy Map.  In their book ‘Strategy Maps’ they talk about five ways  in which corporate-level risk management can create shareholder value in ways that investors could not accomplish on their own.  Risk management may begin by dealing with fluctuations in income and cash flow.  However a risk management program should go further.  Your risk management plan should:

Reduce the risk of incurring costs associated with your own financial distress

The prospect of your financial distress can cause customers and suppliers to minimise their business with you.  Renegotiating the terms of business, defaulting on debt covenants or working through bankruptcy incurs considerable costs to shareholders.  Do you have processes to show customers and providers how you have reduced this risk?

Reduce risk faced by your employees undiversified investment in your company

Your employees may have a disproportionate share of their wealth tied up in your company.  These may include share options, company retirement plans and company-specific skills.  How can you reduce these risks and share the cost of this reduction with your staff?

Decrease Taxes

Managing risk in a graduated income tax system usually means smoothing your earnings to avoid the higher rates.  Do you have a specialist guiding you through the intricacies of your local tax law?

Reduce the cost for investors and creditors to understand the risk of doing business with your company

If your investors and creditors find it difficult to quantify the risk of doing business with you, they may demand a higher return to compensate for the higher monitoring costs.  Are you reporting from more sophisticated risk management techniques to lower the unpredictability of cash-flows and earnings of your investors?

Provide internal funds for investment.

Moves in business require the investment of capital.  Have you provided capacity to invest in value-enhancing projects?  How can you change your operation, or capital structures or what insurance or financial instrument can you purchase?

Extending your risk management expertise to your customers

Kim and Mauborgne list ‘risk’ as one of the utility levers on which to design your customer experience. You can extend your expertise in managing your own risk, to your clients as part of your offer.  What processes or service can you create can lead your clients and customers into the most effective and therefore sustainable decisions?

Preparing for operational risk

One of the pleasures of climbing was pouring over route-books and looking up at rock faces to evaluate the route and our chances of success.  We would look at the difficulty of the route, the weather, our skill and health amongst many other considerations.  What risk criteria do you look at as you evaluate your next move?

When I showed the thinking in this note to my friend George Evans, a tax specialist at MMI International, he shared with me the list of criteria he uses in the tool for evaluating the risk in a new venture.  These include:

• Change of law risk:  What relevant legislation is currently under review and how will the changes impact the venture?
• Reputational risk:  How will the initiative affect the perceptions of stakeholders?
• Size: The financial impact of the transaction.
• Aggressiveness:  What is the magnitude and impact of the change to be wrought by the initiative?  How different is this from industry practice?  How alarming will this be to those invested in your brand?
• Strength of opinion:  How strong are the opinions supporting the initiative?  Are their precedents pointing to the reliability of opinion?
• Ability to execute:  Do you have the skills to bring about the change as envisaged?
• Downside mitigation:  The extent to which an unfavourable outcome can be offset by alternative actions or strategies?
• Upside benefit:  The financial benefit of a particular structure or transaction needs to be determined. This would form part of the overall cost benefit consideration.

Therefore we can engage in life.  We can do dangerous things with an acceptable level of safety.  So put on your helmet, check your ropes and choose your risks.