#4: Exploit Risk Opportunities

Embrace, Don’t Eradicate, the Right Risk Exposures

Harmonize executive risk tolerances and pursue those you are uniquely positioned to manage.

During the financial crisis, the possibilities you’re able to see and seize will be shaped by your unique risk exposure and capabilities. Perspectives on risk differ not only among companies, but between executives within an organization. Especially in times of financial uncertainty, the best companies harmonize these divergent views—not to suppress diverse viewpoints, but to create a common decision-making framework. For example, an executive team that aligns Sales and Finance to use its strong cash position to drop price and increase market share can move more decisively than an executive team where Sales and Finance are at odds.

The best companies view their partners up and down their value chains (i.e., suppliers and customers) as part of an “extended enterprise. This holistic perspective enables them to evaluate the interconnected risks across their value chains, grasping the complete risk picture better and faster than competitors. For example, companies with an extended enterprise view have the ability to identify vendor viability and business partner risks that might otherwise go unseen. Consequently, they’re able to determine the most effective methods for managing these risks either by narrowing or diversifying partners.

Evaluate your contract portfolios with an eye toward renegotiating past (and changing future) contract terms.

What made sense a few months ago may no longer be in your best interest. Against the backdrop of changing financial conditions, companies need to identify and renegotiate the contractual obligations that they (or other parties) may not be able to meet. Examine these agreements literally: covenants that might have been waived or overlooked in the past may very well be enforced now. For example, the inability to raise capital or maintain certain credit ratings may trigger debt covenants and require additional expenditures, depending on your financial condition and outstanding credit exposure. The best companies will reevaluate both recent and pending contracts to find potential cost reduction and upside opportunities.

Robustly manage fraud risks by identifying and punishing incidents of misconduct early in the down cycle.

In bad times, the risk of bad behavior also rises. As employees and even customers experience heightened pressure to “hit the numbers,” companies’ risk exposure increases on all fronts. In response, you must carefully assess fraud risk across the organization, identifying emerging hot spots. (For example, business units that face significant job cuts or are likely to underperform in the next 6–12 months.) It is also likely that insider trading will rise in tandem with major shifts in strategy, industry consolidation, and rapid leadership changes. Your best protection is to police your own organization more proactively —communicating the company’s position on noncompliance, implementing a “no-tolerance” policy for compliance failures, and providing employees with real-life examples and guidance to demonstrate your commitment to compliance and ethics in any environment.