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The real value of operational risk

If an operational risk function is focused primarily on maintaining risk registers,it is not probably delivering it's full value to the organization.

A risk register captures what the organization believes could go wrong.However,it does not necessarily reveal what is actually going wrong within daily operations.

Operational risk rarely presents itself in a neat format such as "risk event likely to occure:Impact high".In practice,it is often embedded in seemingly routine operational weaknesses.

A risk register is not risk management, a decision architecture is.

A number of organisations maintain risk registers, yet remain perilously exposed when conditions change.True resilience starts long before risks are recorded.It all starts with clearly defined objectives, risk appetite, tested assumptions,credible scenarios and agreed triggers.

The real measure of effective risk management is simple:

Does risk information drive better decisions and timely action?

1. Identify threats and opportunities that could
impact strategic objectives.
2. Understand both inherent and residual risk
exposure.
3 Assign clear accountability for risks and
controls.
4. Implement treatment actions before issues
escalate.
5. Monitor key risk indicators and emerging
trends.
6. Escalate and respond when exposure
exceeds agreed tolerance levels.

Waiting until a risk materializes is not risk
management.It is crisis management.

The difference between organisations that withstand disruptions and those that struggle often comes down to one thing:

How quickly they turn risk insights into action.

When was the last time your risk framework changed a critical business decision?

So why waiting?

Let's start the conversation.

.

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But the building is still on fire.

"We applied the controls and updated the risk register( be it a RCSA or an IBAM).The residual risk is now officially low".

Yet the building is still on fire.

This is one of the greatest dangers of heavily relying on residual risk ratings. The reliance often lead to confusing risk reclassification with actual risk reduction.

Residual risk ratings have a tendency of providing comfort but comfort is not control at all.A revised score does not extinguish the threat, eliminate the uncertainty or prevent a loss event.

A risk is not reduced because someone somewhere said it has been reduced.A risk is only reduced only when the conditions that create the risk have been materially addresses.

The danger lies in believing that governance paperwork reflects operational reality.Too often,organisations celebrate a lower rating while the underlying vulnerabilities remain unattended to.

A call to action:

As leaders,we must demand proof of reduced exposure, not just evidence of completed controls.Challenge the status quo.Test the effectiveness of every deployed mitigation.Always verify that uncertainty has genuinely decreased because if the building is still on 🔥,changing the sign at the door doesn't make it safer to enter.

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For all your consultancy and training needs.

Risk managers are enablers.

1.Risk management enables decisions, it doesn't make them.
The risk management's role is to provide independent insight into the risk,exposures and trade-offs associated with strategic choices.Determining which objectives should take precedence,whether growth, profitability,resilience,compliance or sustainability,remains the Exco and the board's field.

NB. Risk management informs decisions.Leadership and governance make them.

2. Transparency of trade-offs is critical.

Virtually every strategic decision involves competing priorities.Pursuing growth may increase risk exposures, strengthening controls may affect speed to the market, investing for the long term may impact near-term financial performance.Risk management creates value by ensuring these trade-offs are clearly identified,quantified and understood before decisions are made.

NB. The quality of strategic decisions depends on the visibility of the underlying trade-offs .

3.Hidden trade-offs create greater risk.

Risks do not disappear when tensions between objectives are ignored.When trade-offs are not explicitly surfaced and challenged,they become embedded within business decisions,often remaining unseen until they result in financial loss, regulatory action,operational disruption and or reputational damage.

Closing question for the Board:

Do we have sufficient visibility into the material trade-offs underpinning our strategic decisions,and are we confident that material risks are being transparently surfaced,challenged,and governed before they impact organisational performance and stakeholder value.

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Climate change and sustainability is the topic of the day.

Get out of paper

The saying goes when gold and inflation are rising while the government is saying things are under control then know that someone is lying.

The economic recession and depression are two troubling brothers to the working class which are often misunderstood. The former is, at a minimum, a contraction of the GDP for two consecutive quarters while the later is the contraction that can take years or even decades to reset.

During a recession, the working class wait it over by practices like cutting budget and even borrowing.However, when depression hits,the working class got wiped out.The center won't be holding.The falcon won't see the falcon. Markets overheat, credit disappear like dew in the morning.Banks stop lending to each other and liquidity squeezes. Inflation spike and gold firms.

When things go southwards like this,the wealthy migrate their portfolios to harder assets like gold and exit the paper. Harder assets work for you not the other way round of paper when push comes to shove.

During crisis the middle class need to learn to see,grab and utilies opportunities to move a bracket up.They need to get out of paper and go into harder assets for harder assets never disappoint all the way.

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POLICY RISK
Personally, i think that there is no such thing as policy risk but policy makers risk. What we term today as policy risk is an out not the driver.The driver is the maker(s).

Any policy inconsistancy must be owned the the makers and must be measured to that.There is no such thing as policy failure or inconstancy but policy maker(s) failure. I think it's high time we stop blaming those documents and instruments, they know nothing at all and shift all the responsibility to those who sit around the tables proclaiming that which doesn't work just because they are in a position of authority.

Policy failure or inconstances must be taken to courts and have a living liability to the makers.That way we can try and minimize the losses that come with these frivolous statements framed as policies that only come to bring harm and mayhem to otherwise healthy run organisations.

So organisations out there,when analysing policy "risk" as it is usually termed, scrutinise the makers more.That way, the actual risk will be exposed as well as it's actual treatment.

To my learned colleagues around the world, I think it's high time we craft something like the policy failure or inconstancy laws the same way laws are existing in the medical profession wherein doctors are held liable for wrong medication, procedures and the like, for an organisation is a living and independent entity that should enjoy the right of life.

Happy independence Zimbabwe.

FRM guru.