Auditing Strategic Risk

No doubt events of the past several years have heightened firms' sensitivities to the many financial risks inherent in operating in today's global marketplace. But are firms today any more aware of their strategic risks? In early July, Bloomberg Businessweek published an article by Corporate Executive Board (CEB), which thoughtfully makes the case for auditing strategic risk alongside other risks like compliance risk. The authors assert that, "The strategic decisions made during this stuttering economic recovery, and the execution of those decisions, will determine a company's successes or struggles for many years to come."

To carry out their research, CEB analyzed major declines in selected firms' market capitalization. What they found was that 68% of risk events are strategic in nature; collectively these events were responsible for destroying over 50% the companies' value. Another 13% of the risks were operational. Both types comprise a majority of a firm's total risk, yet they are often inadequately attended to by a firm's management activities.

The authors make a case for assigning strategic risk management to the internal audit function. "Audit functions should first align all of their work to the key strategic objectives of the company and, additionally, seek to provide assurance on the strategy itself. By doing so, audit departments will not only help their companies avoid and prepare for major strategic risks, but will also help their firms achieve important goals." An interesting viewpoint, but one I would challenge on the basis that strategic risk management is a capability most internal audit functions do not typically have.

Internal auditors are steeped in financial knowledge - a vital base to draw from when assessing financial and operational risk. But strategic risk is different; it requires greater business acumen and judgment beyond what might be gleaned from an accounting body of knowledge and a few years of experience. What is necessary to manage strategic risk is strategy knowledge and industry knowledge coupled with facility in applying decision-making frameworks. Simply put, the skills internal auditors have may not be well suited for the type of analysis required to provide ‘assurance' on a company's strategy (whether or not assurance can even be provided on a strategy is another matter all together). Thus, strategic risk management should remain a senior management function guided by the CEO and ideally by the Chief Strategy Officer. While assessment of risk is everyone's job, strategic risk in particular should remain a responsibility of the top team.

Read the Bloomberg Businessweek article

How Does a Short Time Horizon Impact CEO Decision Making?

The glamour associated with the position of CEO fell away years ago. Corporate jets and Manhattan apartments—long attractions of the post—have been usurped with frequent flyer miles and hotel rewards accounts. Gone too is the idea of CEO longevity. In the last 20 years, CEO tenures have shrunk from an average of eight years to four. Not only is it lonely at the top, it is also temporary. But perhaps CEOs and their decisions have played a role in their diminishing tenure.

In the August 2010 edition of The Academy of Management Perspectives, John Martin and Kevin Davis—management professors at the U.S. Air Force Academy—summarize research conducted by Murah Anita, Christos Pantzalis and Jung Chul Park that looks at the link between CEO tenure and investment decisions. What they examined specifically was how CEO decision horizons affect investment decisions and stock market value.

Looking at data from several hundred firms from 1996 to 2003, the researchers found higher stock market valuations among firms where CEO's decision horizons were longer. Further, they learned that firms that had CEOs with shorter decision horizons invested in projects that were ‘fast payback' oriented instead of long-term value oriented. Based upon their analysis, it appears that CEOs with little time remaining in their terms attempt to maximize short versus long-term value.

What is the take away? Keep CEOs in their jobs longer? Maybe or maybe not. Regardless of the average tenure of a CEO, it is important to set up a compensation system that ensures everyone—even the CEO—is truly focused and financially rewarded on long-term value creation.

Read the Academy of Management Perspectives article

Balanced Scorecard

For most people summer affords a mix of work and leisure time. My summer was no different. Out of the dog days of summer, however, I did manage to eke out one Planning through Performance Brief. It is a timely one, particularly as firms head into their strategic planning seasons.

Read the newest PTP brief, Balanced Scorecard, here

If you are considering implementing a Balanced Scorecard or have one already AND are a Linked In user, take a look at the responses to the Strategic Planning Society's question: "Balanced Scorecard—An excellent management tool or a complete waste of time and effort?" You might find a tip or two worth considering.

Read the Strategic Planning Society's LinkedIn post

For more information on Planning through Performance briefs and other great content, visit the PTP section of edbarrows.com.

Strategic Management Society's Strategic Management Certification

Certifications, or the demonstration of professional competency within a discipline, are gaining popularity. In their summer newsletter, the Strategic Management Society (SMS)—the premier membership society for strategic management scholars and high-level practitioners—introduce the SMS Certification Task Force whose purpose is to "investigate the potential for adopting a certification process as a means of fostering the objectives of the SMS." Exciting information for anyone working in the strategy domain and is interested in becoming formally certified.

While the taskforce is only a year old, they have provided initial information on what might be contained in a strategic management body of knowledge. The topic areas currently included are:

• Entrepreneurship and Strategy;
• Knowledge and Innovation;
• Competitive Strategy;
• Practice of Strategy;
• Global Strategy;
• Strategy Process;
• Strategic Human Capital;
• Corporate Strategy and Governance.

For more information on the evolving certification and the Strategic Management Society overall, please visit www.strategicmanagement.net.

I hope you enjoyed the fourth 2010 issue of my e-Newsletter and thanks for reading. Don't forget to visit my blog for more frequent thoughts. As always, keep improving your Planning through Performance! For more on strategy and performance coaching, visit EdBarrows.com.

Sept. - Dec., 2010
Chestnut Hill, MA

Boston College, Carroll School of Management, International Consulting Project—Europe

Ed will work with a small team of graduate business and law students to help a major U.S. retailer explore strategic expansion options.

October 18 - 22, 2010, Washington, District of Columbia

December 6 - 10, 2010, Miami, Florida

Palladium Group’s Kaplan-Norton Balanced Scorecard Certification Boot Camp

Learn the tools and techniques that comprise the entire system of strategy execution from strategy expert, Ed Barrows.

Learn more and register on The Palladium Group's website.

Tom Harrington!

Associate Deputy Director, Federal Bureau of Investigation

Tom "T.J." Harrington was an easy choice for this edition's pink tie award. A lifelong public servant, Tom has spent the last 25 years at the FBI protecting and defending the United States against terrorist and foreign intelligence threats and enforcing the criminal laws of the United States.

This August, T.J.'s outstanding efforts landed him in the Associate Deputy Director's chair, effectively making him the chief operating officer for what many consider to be the world's premier crime fighting (and intelligence gathering) organization. As Director Robert Mueller pointed out, "Throughout his 25 years with the Bureau, T.J. has distinguished himself as an innovative leader. He has led our efforts to become a more intelligence-led organization and initiated proven management practices to track progress, address gaps, and evaluate successes for our highest priorities and initiatives." To that point, I had the pleasure of working with Tom a few years ago when he was implementing the Balanced Scorecard as head of the FBI's Counterterrorism division. Tom and his team's work at the division level eventually led to an initiative to do the same for the FBI overall. Now Tom will be responsible for refining effective strategy and performance management for the Bureau in total. Tom is indeed a forward thinking manager and leader whose efforts have had an essential impact not just on the FBI's strategy, but on the safety of all U.S. citizens at home and abroad. And for a guy who constantly made fun of the color of my ties, this is one award that I am more than delighted to give. What goes around comes around Tom...BZ for a job well done!