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Strategic risk is the main threat to shareholder value, but too many firms are still failing to grasp this nettle.

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Vincent

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No organisation is immune from the threat of bad publicity. Even Ribena, one of the world's most popular soft drinks, gave its parent company an unexpected headache recently. GlaxoSmithKline hit the headlines after two New Zealand schoolgirls claimed that their science project had found that the Antipodean ready-to-drink variety contained only a fraction of the amount of vitamin C stated in the company's advertising campaigns. This demonstrates how risks can come from the most unexpected places.

Most organisations have made progress towards addressing operational and financial risk, but have put far less thought into how they can manage strategic risk effectively. I was interested to learn from a recent CIMA publication that when companies suffer a significant loss in shareholder value, it isn't generally because of "natural hazards" or financial and operational problems. The main causes are usually strategic--for example, the failure of management teams to react to market changes or to integrate effectively after a merger.

Directors who don't build strategic risk into their corporate planning frameworks are gambling with their businesses' long-term survival. So why don't more firms take this issue seriously? The problem is that strategic risk is harder to define than other forms of risk, which reduces its "appeal". This is particularly the case with less predictable, bolt-from-the-blue crises. Some organisations argue that the Ribena-type scenario is merely an operational problem and has nothing to do with a company's strategic planning. Others say that anything which may affect a business's overall strategy should be considered.

This overview of risk management, and some of the different interpretations of it, were outlined in the second of CIMA's Excellence in Leadership reports. The series brings together leading members of the business community and CIMA's technical experts to address hot topics in management. Its articles make absorbing reading. Several drive home the message that strategic risk has a much greater impact on shareholder value than operational or financial risk--and can even destroy a...

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