Article at a glance:
Risk is a fact of business life, but many companies fail to manage it well. McKinsey looked at 200 leading financial-services companies and found 150 cases of significant financial distress between 1997 and 2002. In about half of them, poorly handled risk played a significant role. Unless companies improve their risk management, they expose themselves to unexpected and sometimes severe financial losses. On the other hand, they might be tempted to avoid risk as much as possible to protect themselves and the price of their shares—another costly mistake, since risk ultimately creates shareholder value.
The take-away
Good risk management not only protects companies from adverse risk but also confers a competitive advantage, enabling them to be more entrepreneurial and, in the end, to make bigger profits. Companies should clearly articulate their risk strategies, understand the risks they are taking, and build an effective risk-management organization that helps foster a responsible risk culture.