Category Archives: Strategic Risk Management

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A New Approach to Managing a ‘Classic’ Reputation

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coca cola sweetener challenge

A new Coca-Cola-sponsored contest seems to publicly acknowledge its reputational risk, but at a minimal cost that could manage or even reduce it.

In early August, the beverage giant announced its Sweetener Challenge, seeking non-employees (preferably scientists or agriculture or nutrition professionals) who can bring the company a “natural, safe, reduced, low- or no-calorie compound that generates the taste sensation of sugar when used in beverages and foods.” The winner will be announced in Fall 2018 and will receive million.

Taxes on soda, the decline of its consumption, and mounting data that sours on sugar has unquestionably affected the bottom line for the company and put pressure on the broader beverage industry. By initiating the contest, Coke seems willing to try a fresh approach to manage or favorably alter its reputation as a brand founded on sugary cola, while simultaneously attracting and retaining consumers and generating sales.

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That seems far less risky than not trying new techniques.

“[Reputation risk] is created when expectations are poorly managed and exceed capabilities, or when a company simply fails to execute,” wrote Nir Kossovsky in the 2014 Risk Management article “How To Manage Reputation Risk.” “Managing expectations is all about governance, operations and risk management—the blocking and tackling of running a business. Clearly, there can be perverse brilliance in a business strategy of setting expectations very low.

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Last year, Coca Cola suffered a net revenue decline from $11.5 to $9.7 billion, making the $1 million prize a cost-efficient gamble that, as Kossovsky suggested, can “conceptualize an ideal state and implement a roadmap to reduce reputation risk.”

Other companies have turned to their audiences for new ideas to increase awareness and improve their reputations. Folgers was jonesing for a new jingle this year and paid a songwriting duo $25,000 for a flavorful new take on “the best part of waking up.”

Even the commercial aviation industry sought out-of-this-world innovations from average stargazers. When the X Prize Foundation wanted to inspire the private sector to pursue commercial space flight, it did so with a $10 million prize. The pursuit of the Ansari X Prize generated $100 million in new technologies and was ultimately won by the Tier One project’s ShapeShipOne, which was financed by Microsoft co-founder Paul Allen.

According to Kossovsky, “reputational events are tried in the court of public opinion,” and Coke’s will both there and in stores. The company’s new sugar substitute will be announced in October 2018 and will eventually make its way into supermarkets. With just a few sips, consumers can ultimately decide if the company’s investment and reputation risk management technique was a sweet move.

Can You Have Too Many Coffee Shops?

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The collective mood among Starbucks (SBUX) shareholders may have been dark and intense on Wednesday, following a 1% downgrade of the coffee company’s share price by BMO Capital Markets due to “store overlap.” BMO analyst Andrew Strelzik wrote: “There are now 3.6 Starbucks locations within a one-mile radius of the typical Starbucks in the U.S. relative to 3.3 and 3.2 stores in 2014 and 2012 respectively.

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That statistic does not factor in competitors, and implies that too many franchise cafes are located too closely together and are fighting for the same $2 per tall coffee.

The warning signs of overlap were acknowledged and dismissed by Starbucks CEO Howard Schultz in 2010, when he told the Harvard Business Review: “We’re not nearly close to saturation in North America, despite what the cynics or pundits might say…”

At the time of that interview, Starbucks total store numbers neared 17,000 and by the end of 2016, there were 25,085. Was seven years close enough to the saturation point to heed the warnings? Or does the old cliché about hindsight apply?

The overlap may have led to what’s known as risk failure, which Risk Management explored in a 2016 article, “The True Character of Risk.” Article author Michael J. Mazarr would characterize Starbucks’ market oversaturation as a “gray swan”—a danger that is “known, discussed and even warned about, but then discounted.”

Mazarr noted: “When senior decision-makers become immune to outcome-oriented thinking, they will not give serious consideration to risk. They may continue to give it rhetorical emphasis, talking about what could go wrong, but the trajectory of their judgment will never substantially vary.

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McDonald’s learned this same lesson the hard way in the 1990s. Although it had 19,000 worldwide locations, upper management wanted deeper market penetration and kept expanding. Cannibalization didn’t hurt the corporation at first, but investments in new locations outpaced the profits earned from increases in total sales. That led to the fast food chain closing 100 stores and unveiling the popular, but risky, offer of 55-cent Big Macs to attract and retain customers.

Unlike in 2008, when Schultz closed 600 locations overnight because he felt they weren’t meeting the Starbucks vision, the current problem is not reportedly a result of poor management or the inability to offer upscale imbibing experiences. Starbucks has just provided customers with too many options near their homes, workplaces and hangouts to get their next sandwich or caffeine fix.

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5 Strategies to Maximize Your Risk Assessments

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While risk assessments enable organizations to understand their business issues and identify uncertainties, the best assessments go further. They prioritize top risks, assign risk ownership, and most critically, integrate risk management and accountability into front line business decision-making. Simply put, “checking the boxes” just isn’t enough to achieve an organization’s real objectives.

Effective risk assessments can also give organizations a true advantage. Our sixth annual Risk in Review study–comprising viewpoints from more than 1,500 corporate officers in 80 countries—finds that companies shifting risk management leadership and collaboration to the first line of defense are measurably better equipped to succeed. We call these companies “front liners.” While a majority of companies agree that front line decision-making is ideal, somewhat surprisingly, front liners represent only 13% of survey respondents.

Front liners use effective risk assessment strategies to enable revenue and profit growth, while also creating agility to bounce back from adverse events more quickly than their peers. They also outpace the pack when it comes to using risk management tools and techniques (such as a risk rating system or scenario planning).

Based on the study results, here are five strategies you can adopt to gain a front liner advantage:

  1. Put your risk assessments to use in real-time

For true impact, organizations incorporate risk assessment findings into their business decisions. Assessments should be efficient, and actions should be implemented quickly to address immediate challenges. Annual assessments are a best practice, but our study shows front liners have a robust risk culture, conducting regular assessments. Ongoing collaboration across all three lines of defense, reinforced by continuous monitoring, enables the organization to more effectively align business strategies with risk appetite.

  1. Develop actionable guidance and insights for leadership

Effective risk assessments are relevant and actionable. Be sure to interpret risk information and recommend next steps to help management incorporate the findings into their strategic decisions. Make it easy for boards and senior management to understand the key findings by providing thorough insights. Data will mean a lot more if you identify the recommendations, target outcomes and next steps. Gaining the front liner advantage is best achieved by integrating risk guidance holistically into the organization, including planning, growth strategy and investments to M&A, staffing, disaster recovery and crisis management.

  1. Speak in lay terms

Leaders outside the risk management function may perceive risk assessments as an onerous process loaded with abstract language and a heavy focus on negative outcomes. To help leaders see value in these assessments, define the risks, drivers and consequences in familiar terms using meaningful scenarios that are specific to the organization.

  1. Balance automation with the human touch

While automation enables mass data collection, organizations benefit most when risk assessment surveys are combined with facilitated discussions. Gathering important qualitative information, facilitators can bring together multiple viewpoints and encourage productive debate. Pre-reads may also be a helpful tool to level-set on the organization’s strategic objectives and overall risk landscape.

  1. Adopt a realistic view of risk management

It can sometimes be difficult for management to accept the findings of a risk assessment, especially if they believe there is a low probability such events will occur. To support strategic, risk-based decision-making, risk scenario analyses can spur productive discussions about the organization’s overall risk landscape, while dynamic, engaging tools like a risk scenario dashboard can help to draw in even the most reluctant participants.

Following these strategies can help your risk assessments to not only be relevant, but also essential to your organization’s business strategy and growth objectives.

Fewer Sleepless Nights for Compliance Executives

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Improved compliance programs, sufficient resources and board access have meant fewer concerns about personal liability for compliance executives, according to a study by DLA Piper.

In its 2017 Global Compliance & Risk Report, DLA Piper found that 67% of chief compliance officers surveyed said they were at least somewhat concerned about their personal liability and that of their CEOs, which was down from 81% in 2016. And 71% said they made changes to their compliance programs based on recent regulatory events, up from just 21% a year earlier. The study found that globally the compliance function is becoming more independent and prominent in large organizations.

There still remains room for improvement, however, most notably in compliance’s relationship with boards of directors. Directors, surveyed for the first time, were more uneasy, with 82% expressing at least some concern about personal liability. “This is likely related to other findings that show lingering kinks in communications channels and a persistent lack of training for directors. Together, these findings indicate that the relationship between the compliance function and boards needs work—despite efforts taken by organizations to upgrade their compliance program,” DLA Piper said.

In 2016, 77% of compliance executives said they had sufficient resources, clout and board access to support their ability to effectively perform their jobs. This year the number rose to 84% who said they felt that way. The improvement is possibly a reflection of the increased percentage of respondents who had the resources to make changes to their compliance program, compared to 2016, according to the survey.

While more respondents said they are increasingly able to affect change, obtain the resources they need and access senior leadership, however, a larger number said their budget was not high enough to accomplish their goals, from 28% in 2016 to 38%.

Boards had a different view, with 53% of directors agreeing strongly that their compliance group had sufficient resources, clout and board access. This was compared to just 29% of CCOs, which could indicate that CCOs are not effectively communicating their needs, the company said.

Of concern was that many directors appear to be receiving inadequate reporting and training on compliance matters. About a quarter of both CCOs and board members said the compliance function at their organization reports to the board less than once per quarter.

Of training, the report said that in light of a perceived heightened liability exposure for directors, it is puzzling that 44% of director respondents said they hadn’t received any training on compliance issues. Given evolving compliance standards and regulations—such as new Securities and Exchange Commission guidance on conflict minerals and updated DOJ guidance on corporate fraud—it’s arguable that training is more important than ever. Failure to engage in training could amount to a breach of fiduciary duty.

Almost half of respondents, 46%, identified monitoring as the weakest part of their compliance program. Monitoring, however, is particularly important in managing third-party risk, as regulators remain focused on violations related to third parties and as companies struggle to manage sprawling global organizations, DLA Piper said.

Top tools companies use to rate their compliance program: