Why do cars have brakes?

Intuitively, you’re probably thinking: “So the driver can stop the car.”  But, think about it from a different perspective.  When you get in a car, it’s stopped, so you don’t really need the brakes to stop it.  Instead, it seems the real purpose of brakes is to allow the driver to make the car go fast.  After all, would you get in a car and drive it if you knew it didn’t have brakes?

A company’s risk management function serves a similar purpose.  The ultimate objective of strong business risk management is not about avoiding risk, but about the ability to take reasonable risk.  As an investor, you would neither invest in a company that wasn’t taking risk nor in a company that didn’t have a good risk management function.  Without taking risk, there is no opportunity for reward.  And, inadequate risk management practices are almost always a guarantee for a financial wreck.

Unfortunately, all too often this perspective seems to have been lost.  Instead, in this sound-bite world the risk management narrative is mostly about eliminating risk to guarantee that investors don’t lose money.  This is neither realistic nor good public policy for an innovation-based economy.  The United States’ capital markets efficiently take excess capital and allocate it to new ideas and opportunities for growth.  Central to this process are strong and pro-business risk management functions within companies.

Sure, no one wants to see investors lose money.  But, strong risk management is not about complete risk avoidance.  Rather, it’s about ensuring a company takes reasonable risks along its chosen strategic path, monitors the journey for unexpected dangers and provides that timely steps are taken to minimize losses and to make quick adjustments to keep pace with the competition and meet the needs of consumers.  As stated in Business Roundtable’s Principles of Corporate Governance, “it is the responsibility of management, under the oversight of the board, to develop and implement the corporation's strategic plans, and to identify, evaluate and manage the risks inherent in the corporation's strategy.”

The bottom line: Strong risk management functions integrated into a company’s corporate culture promote business success by fostering reasonable risk-taking and providing early detection systems to minimize loss from failures.  In any well-run business, a reasonable level of failure must be an option.  Without this possibility, the opportunity to take risk in the pursuit of new, innovative and profitable ideas gets lost and investors, consumers and the broader economy suffer.