Conventional risk tools are no longer fit for 21st century businesses, according to Airmic’s chief executive. John Hurrell said a new approach to risk mapping should be considered and urged members to get involved in the debate on Airmic’s discussion paper on risk and the business model.
Hurrell said: “Many of the biggest risks businesses face now are intangible and interconnected – such as reputational risk, cyber threats and supply chain vulnerability. The conventional tools, such as risk registers and traditional event and scenario-driven risk maps, used for understanding these risks are struggling to cope.”
He pointed to recent survey data from McKinsey which revealed that almost a third of UK companies say their boards have ‘limited or no understanding’ of the risks their companies face. “This is an alarming but revealing statistic,” he said. “We know from our research that boards are waking up to the importance of good risk management, but clearly some directors are struggling to know where to begin.”
Airmic has been working with the Chartered Institute of Management Accountants (CIMA) on a new approach which links risk management to the business model, he said. “The project has very much brought to light the need for a re-think on how we view and assess risk in modern businesses.”
Airmic and CIMA published a preliminary discussion paper in June, Looking through the Risk Lens, which argues that companies should take a fresh approach to risk by explicitly linking a company’s risk vulnerabilities to its business model. According to the paper, boards are under growing pressure to understand and explain the risks facing their business, but many senior executives feel they do not have the right tools and knowledge to have meaningful risk-related conversations and to cut through to the risks at the very heart of the business strategy.
It therefore urges businesses and risk professionals to consider a new approach to risk whereby the four components of a business model – inputs, business activities, outputs and outcomes – are used as a basis for identifying the risks found in each layer of the business’s value creation process.
This will not only allow boards to receive an overarching view of risk but will also make it easier to scrutinise the sustainability of how the business makes money. Airmic and CIMA are now seeking feedback from risk and business professionals on the discussion paper before developing the model further. Hurrell added: “What Airmic and CIMA are proposing is a completely new way of thinking when it comes to risk at the board level. We don’t want to develop our ideas in isolation so we’re hoping for some honest feedback from our members.”
He added that the feedback will inform the next stage of the project: “Once we’ve gathered feedback on our initial report, the next step will be to create a more robust and comprehensive approach to risk mapping that is fit for the 21st century. This won’t happen overnight but feedback from business communities so far is that the demand is really there.”