Hurricane Risk

THE

STRATEGY

EXECUTION

SOURCE
Article Reprint No. B0911A

Risk Management and the
Strategy Execution System
By Robert S. Kaplan

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BALANCE
ON

Risk Management and the
Strategy Execution System
By Robert S. Kaplan

Besides rethinking strategy, perhaps nothing has preoccupied business leaders these past months more than their failures in risk management. In this ambit, Robert Kaplan explores how risk management can be better integrated into strategy execution. An analysis of risk management—its history and mainstream approaches—and of resulting market failures leads him to conclude that risk management should be viewed as a third leg of shareholder value creation, along with revenue growth and productivity. Here, Kaplan introduces two important concepts: a three-level hierarchy of risk; and the risk indicator scorecard, a parallel to the strategy scorecard that he and David Norton conceived nearly two decades ago.

The financial crisis that erupted in
2007 revealed a major gap in the management systems of companies, especially those in the financial sector. Companies’ management systems were focused on shareholder value, revenue growth, productivity, cost control, and quality. But few explicitly incorporated risk. At recent speaking events, I have been asked whether using the Balanced
Scorecard would have helped the failed companies avoid the catastrophe they inflicted on shareholders, creditors, and the world economy. I usually respond by articulating the hope that adopting the BSC, whose underlying philosophy entails seeking