While strategy-setting defines an enterprise’s overall strategic direction, differentiating capabilities and required infrastructure, a business plan lays out how an organization intends to execute a strategy during an annual period or, if longer, the operating cycle.
The latest issue of the Board Perspectives: Risk Oversight newsletter examines the relationship between business planning, risk, and performance management, and how integrated business planning can incorporate the risk management capabilities needed to address critical risks.
How should risk be integrated into the annual business planning process?
It is critical to define the inherent soft spots, loss drivers and incongruities that could dramatically affect performance and adversely impact execution.
Certain seasonal fluctuations can be expected, but it's crucial to also consider unexpected events that may cause business disruption and expose a company's failure to match the debt maturity profile to the ultimate realization of assets that its debts are funding.
Ultimately, reliable budgeting and forecasting processes in which management and the board have complete confidence are crucial to the business planning process.
Considering performance management
Risk management begins to intersect with performance management when a company identifies the appropriate metrics and measures to monitor. When the strategy-setting process contributes to a better understanding of inherent risks, that understanding provides inputs to the determination of key metrics and targets.
Ideally, traditional key performance indicators (KPIs) and key risk indicators (KRIs) should converge and provide direction as to what should be managed in the execution of the business plan.
Questions for boards
Based on the risks inherent in an entity's operations, here are some questions that the board of directors may consider:
Does the business plan:
Decompose the critical steps required to achieve key business objectives into performance plans supported by key metrics and targets that establish accountability for results?
Identify the soft spots and potential loss drivers that could dramatically affect performance and adversely impact execution of the plan and delivery of expected financial results?
Link the reward system to performance expectations through a balanced compensation structure that is fair to both the near-term interests of employees and the longer-term interests of shareholders?
- Do senior management and the board have confidence in the reliability of the organization's budgeting and forecasting processes?
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Board Perspectives: Risk Oversight is a periodic newsletter that offers ongoing commentary about the risk management oversight process for boards of directors. The goal is to provide board members with concise discussions of practical ideas that will help them improve their boards' risk oversight.