The Two Headed Coin

Discover the interplay between strategy and risk in this insightful new resource from two experts in the financial industry who have applied their knowledge to multiple industries

In The Two Headed Coin, accomplished authors James L. Darroch and David Wm. Finnie deliver an insightful exploration of the interplay between strategy and risk that underlies the operational framework of successful organizations. You'll learn which risks are fundamental to the strategic positioning and goals of your organization and which are not. You'll also discover the importance of an independent risk function, e,g., the CRO, and its invaluable role as part of the strategic process.

You'll also find:

• A thorough discussion of the notion of competitive advantage and how it relates to risk
• An exploration of consumer perception and reputation as an asset to be managed
• How to use scenario planning and real options to provide a framework for managing uncertainty
• How a focus on culture and ethics can minimize the risk of large losses due to adverse behaviors

Perfect for risk management and strategy professionals The Two Headed Coin will also earn a place in the libraries of executives and managers who wish to improve their ability to integrate strategic and risk thinking to create competitive advantage.

Preface: Risk is Good and Uncertainty is the Reality! xi

Acknowledgments xxv

About the Authors xxix

Chapter 1 Strategy and Risk: Two Sides of the Same Coin 1

Strategic Positioning and Risk 6

Strategy and Risk in a Start-Up 7

Chapter 2 Executing on the Plan and Discovering New Risks 17

The Assumption of Goal Congruence and the Importance of Culture 21

Conclusion 27

Chapter 3 Which Risks to Keep 31

Strategic Positioning and Risk Governance 38

How Does Risk Management Help Close the Gap Between Strategy Formulation and Execution? 40

Conclusion: Embracing and Managing Risk 42

Chapter 4 How Do We Achieve Independent Risk Governance and Improve Performance? 47

What Do We Mean by ERM? 51

Chapter 5 Who Has the Specific Knowledge to Design the Risk Architecture? Why You Need an Independent Risk Function 61

The Strategy-Risk-Governance Process 61

Meeting the Objective and the Categorization of Risks 69

The Risk Architecture 71

Creation of a Risk Function 73

Conclusion 76

Chapter 6 Enterprise Risk Management and Competitive Advantage 79

How Does Strategy Affect Randomness? 86

Chapter 7 What Reputation Do We Want? With Whom? 91

Managing Reputation Risk 99

Chapter 8 Uncertainty, Scenario Planning, and Real Options 105

Real Options 113

Conclusion 116

Chapter 9 Risk Culture and Ethics: Can You Have Excellence and Consistency at the Same Time? 121

The Advisor-Customer Encounter 124

Control Systems, Discretion, and Ethics 127

Culture, Ethics, Performance, and Risk Management 135

Chapter 10 The Top of the Pyramid: The CEO as Integrator of Strategy and Risk and the Board as the Fourth Line of Defense 141

The CEO: The Operational Integration of Strategy and Risk 145

The Board: The Governance Integration of Strategy and Risk 145

The Board Provides More Than Oversight 146

Epilogue: Decision-Making at the Restaurant: Creating and Executing a Risk-Aware Strategy 151

Appendix I: Risk Transformation and the Need for an Integrated Risk Approach 157

Appendix II: Resiliency 161

Bibliography 167

Index 183

DR. JAMES L. DARROCH is currently CIT Chair in Financial Services, Schulich School of Business, York University and Associate Professor, Policy, Schulich School of Business, York University. James is a sought-after expert in strategy and financial services education. In 2017, James and his co-author Patricia Meredith won the distinguished Donner Prize (award for the best public policy book by a Canadian) for Stumbling Giants: Transforming Canada’s Banks for the Information Age.

DAVID WM. FINNIE is a senior corporate executive with over 20 years’ experience leading large and mid-sized multinationals and Fortune 100 companies in the building and optimization of their financial, capital, and risk management strategies and capabilities. In addition to risk management expertise, he also offers strengths as a strategic business leader helping to define and implement business growth strategies and drive new business development. David has published four short articles on risk management, governance, and strategy.

In The Two Headed Coin: Unifying Strategy and Risk in Pursuit of Performance, distinguished risk and strategy professionals James L. Darroch and David Wm. Finnie deliver a wide-ranging and insightful analysis of the interplay and relationship between risk management and strategy in organizational success. The authors explore the tradeoffs and tensions between strategy and risk management, including how to determine which risks are fundamental to the strategic positioning of the firm and how non-fundamental risks can be managed to enhance performance.

Throughout the book, Darroch and Finnie focus on the importance of embedding risk management into every part of your organizational and strategic planning, creating an inclusive, integrated, and seamless process that captures the interdependencies that unite risk and strategy.

You’ll discover a thorough discussion of what competitive advantage actually means and how it relates to risk, as well as a fresh perspective on consumer reputation and perception as an asset to be managed. You’ll learn to use scenario planning and real options as a framework for managing uncertainty. Finally, you’ll find out how to focus on culture and ethics in order to minimize the risk of large losses caused by adverse behaviors.

The Two Headed Coin offers readers a modernized view of the Chief Risk Officer and how they have an invaluable role to play as part of the strategic process. Also, the importance of the Chief Executive Officer and their role as the locus of the reconciliation of strategic risk decisions is explored.

Perfect for risk management professionals in financial institutions, The Two Headed Coin is also an ideal resource for any executive, business leader, or manager who seeks to improve their ability to integrate strategic and risk thinking to create competitive advantage.

Praise for THE TWO HEADED COIN

“David and James bring the keen eyes of experienced practitioners, theorists, and educators to The Two Headed Coin. That unique combination of perspectives is necessary to convey to others the successful integration of strategy and risk to our pursuit of corporate goals. This ambition is at the heart of their book and I enjoyed the opportunity to read it.”
—David R. Koenig, author, Governance Reimagined and The Board Member’s Guide to Risk

“I greatly enjoyed reading this book. The use of a readily understood business to provide examples of the concepts developed through the book is helpful in putting risk, strategy, governance, and the integration of these into the practical context of real life.”
—Francois Desjardins, former President and CEO, Laurentian Bank

EXPLORE THE VITAL AND UNBREAKABLE CONNECTION BETWEEN RISK AND STRATEGY

Although it’s often relegated to an isolated silo, risk management is a fundamental part of strategic planning. And in The Two Headed Coin, authors James L. Darroch and David Wm. Finnie show you the interplay between the two interconnected forces of risk and strategy. You’ll discover how to identify those risks that are essential to the strategic positioning and goals of your organization and those that can be translated into risks that the organization has the capability to manage.

A rigorous and practical perspective on competitive advantage undergirds and informs more specific discussions of individual executive and leadership positions like the Chief Risk and Executive Officers. You’ll also find out how an unrelenting focus on culture and ethics can minimize the risk of sustaining large losses caused by aberrant and adverse behaviors. Finally, you’ll learn how to use real options and scenario planning to create an uncertainty management framework.

Ideal for professionals who manage risk in financial institutions, The Two Headed Coin is an indispensable resource for business leaders who hope to create enduring competitive advantage by integrating their organization’s concept of risk into their long-term strategic planning.