SoF CLIPS | Risk Management is Misunderstood by Srini Phatak, Deputy CFO of Unilever

Strategy of Finance

Rethinking Risk Management: A Strategic Approach

Risk management is often misunderstood as a restrictive and defensive practice. Many view it as a hindrance, focusing on the negatives and potential failures. However, this perspective misses the broader, more strategic role that risk management plays in driving success. Let's explore a more integrated and proactive approach to risk management.

The Importance of Taking Risks

Taking risks is essential for achieving higher returns. In every decision we make, whether it's choosing to act or to abstain, we are inherently taking risks. Avoiding risk entirely is not only impractical but also counterproductive. To succeed and achieve significant growth, it is crucial to embrace risk as an integral part of the decision-making process.

Integrating Risk Management

Instead of treating risk management as a checklist item at the end of a proposal, it should be viewed as a fundamental aspect of strategic planning. By thinking about risk management from the outset, we can identify and address potential challenges proactively. This approach allows us to balance risk and opportunity effectively, leading to better outcomes.

Consider the following reframed approach:

1. Identify Opportunities: Start by clearly defining your goals. For example, if your objective is to attract more consumers, increase prices, or achieve cost savings, articulate these targets upfront.

2. Assess Necessary Risks: Once the goals are set, determine what risks need to be managed to achieve these objectives. Instead of asking, "What if this goes wrong?" focus on "What do we need to do to make this work?"

3. Develop a Risk Management Strategy: With the opportunities and associated risks identified, create a comprehensive strategy to manage these risks. This includes mitigating potential downsides while leveraging opportunities for growth.

Reframing the Risk Question

The traditional approach to risk management often centers on the fear of failure. This mindset can stifle innovation and progress. Instead, we should reframe our thinking:

Old Question: "If I price up, there is a risk."

New Question: "I want to gain more consumers and increase prices. What does it take to get there, and what risks do we need to manage?"

By shifting the focus from fear to opportunity, we create a more positive and proactive environment. This encourages taking calculated risks that drive growth and innovation.

The Role of Leadership

Effective risk management requires strong leadership. Leaders must foster a culture that embraces risk as a natural and necessary part of achieving success. This involves encouraging open discussions about potential risks and opportunities, promoting a balanced view of risk-taking, and supporting teams in developing robust risk management strategies.

Conclusion

Risk management should not be seen as a restrictive or defensive practice. Instead, it should be an integral part of strategic planning, focused on balancing risk and opportunity. By taking a proactive and integrated approach to risk management, we can unlock new opportunities for growth and success. Remember, every decision involves risk. The key is to manage these risks effectively to achieve your objectives.

Embrace risk, reframe your questions, and lead with a balanced approach to risk management. This strategic mindset will help you navigate challenges and drive your organization forward.