In the first article on this topic, we looked at the growing need for effective risk management in today's complex business environment and argued that where boards and senior executives must do more to prioritize risk management as a strategic asset rather than simply a compliance exercise. This shift to a proactive stance can not only mitigate potential losses but also unlock significant value and resilience.  Also, corporate reputations are vulnerable to single events, as risks once thought to have a limited probability of occurrence are actually materializing.

In this article we identify three key dimensions to effective risk management: a robust risk operating model, strong governance and accountability structures, and comprehensive crisis preparedness as follows:

1. Risk Operating Model: This includes an enterprise risk management (ERM) framework for identifying and prioritizing risks, defining risk appetite, and implementing appropriate controls. Individual frameworks should also be established for specific risk categories.

2. Governance & Accountability: A clear governance structure with defined accountabilities across the three lines of defence (business operations, risk & compliance functions, and audit) is essential. This ensures ownership and effective challenge within the risk management process.

3. Crisis Preparedness: Companies need to develop detailed crisis response playbooks, conduct simulations, and train managers at all levels to ensure a swift and coordinated response to unexpected events.

To be effective, the entire risk management framework must ensure that all layers are seamlessly integrated, providing clarity on risk definitions and appetite as well as controls and reporting.  In getting there, here are the key actions for companies:

• Board Leadership: The board and senior management must prioritize and actively champion a robust risk culture and management framework.

• Invest in Resources: Companies need to allocate sufficient resources to risk management functions, including skilled personnel and advanced analytics capabilities.

• Develop a Comprehensive Risk Taxonomy: A clear and comprehensive risk taxonomy is essential for consistent risk identification, assessment, and communication.

• Clearly Define Risk Appetite: Companies should define their risk appetite, balancing risk-return trade-offs and avoiding overly relaxed or restrictive stances.

• Build a Strong Risk Culture: Fostering a culture that values risk awareness and proactive management at all levels is crucial.

• Prepare for Crises: Develop detailed crisis response plans, conduct regular simulations, and train managers to ensure a swift and effective response to unforeseen events.

Far from minimal regulatory adherence and loss avoidance, the optimal approach to risk management consists of fundamentally strategic capabilities, deeply embedded across the organization.

By embracing a proactive and strategic approach to risk management, companies can transform risks into opportunities, fostering resilience, and unlocking sustainable value.