Strategic Risk Management Is Crucial But Often Overlooked
May 11, 2023
According to a white paper on the Workiva blog, strategic risk management is a crucial but routinely overlooked aspect of enterprise risk management. ERM has focused on financial and operational risk. The paper defines strategic risk management as the process of identifying, quantifying, and mitigating any risk that affects or is inherent in a company’s business strategy, strategic objectives, and strategy execution. Types of strategic risks may include: shifts in consumer demand and preferences; legal and regulatory change; competitive pressure; merger integration; technological changes; senior management turnover; stakeholder pressure. It is measured by two key metrics: Economic capital is the equity required to cover unexpected losses based on a predetermined solvency standard derived from the company’s target debt rating; Risk-adjusted return on capital (RAROC) is the anticipated after-tax return on an initiative divided by its economic capital. If RAROC exceeds the company’s cost of capital, the initiative is viable and will add value. If RAROC is less than the cost of capital, it will destroy value. The paper states categorically that strategic risk represents the greatest dangers and opportunities any company faces.
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