Difference between making good and great decisions

The board’s oversight of risk management efforts can enhance credit union’s long-term success.

September 21, 2020

The board’s most important role is to evaluate, refine, and approve strategies about your credit union’s future direction. An actively involved board adds significant long-term value and addresses expectations of oversight by outside stakeholders, such as members, auditors, and regulators.

Research indicates leaders are more likely to make good strategic decisions when they consider alternative views and thoroughly understand risk and reward trade-offs.

This level of decision-making significantly minimizes unexpected operational surprises and financial volatility.

Consistent risk-based decisioning elevates organizations to positions of market leaders with long-term sustainability.

The ability to make great decisions lies in being able to beat the odds in the face of uncertainty.

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Fundamentally, having the wherewithal and processes to identify, quantify, and internalize potential future scenarios and events facilitates informed decisions. At the core, these decisions capture value by maximizing the risk/return trade-off.

Enterprise risk management (ERM) continues to advance organizational capabilities.

Risk management is an integral component of strategy, culture, and business operations, but it is often seen as merely a compliance activity and a hindrance. Decisions made without an understanding of the likelihood of future events and their effects on the organization’s strategic plans cannot adequately create a solid picture of risk/reward trade-offs, which significantly diminishes the likelihood of success.

Success requires business leaders to have timely information and to accept that decisions are never 100% certain. It’s a matter of increasing the odds of making the right decisions consistently.

‘The ability to make great decisions lies in being able to beat the odds in the face of uncertainty.’
Tony Ferris

The board can do its part to ingrain and facilitate ERM at the credit union.

The board should not be involved in day-to-day risk management practices. Instead, through its oversight role, the board should ensure the credit union has in place a comprehensive and organization-wide framework, a culture of risk management across the organization, and effective processes in all levels of management.

The benefits of these efforts are far reaching. They include the determination of capital adequacy to balance growth and security, alignment on risk appetite to accomplish the credit union’s goals by allowing management to freely make decisions within defined expectations, and a shared understanding of key risks and risk-mitigation efforts.

This allows for more effective and efficient use of capital and resources by focusing efforts on what is truly important.

Boards can take five key actions to build a strong risk management program:

  1. Create a formal risk framework and make the CEO accountable for the risk program.
  2. Set the tone for open, independent communication by demonstrating a willingness and receptivity to hearing bad news and providing a credible challenge to underlying management assumptions for improved transparency.
  3. Define an acceptable risk appetite to serve as a set of guardrails for risk taking. Require regular dialogue on the principal risks facing the organization, and determine the appropriateness of risk-mitigation activities.
  4. Develop a board risk committee to oversee this function and facilitate efficient governance practices.
  5. Engage with outside experts to periodically review the risk process to eliminate bias and infuse evolving best practices.

By understanding the relationship between critical assumptions underlying business strategy and risk management, the board can strengthen its oversight role.

Ensuring these processes are culturally and operationally integrated will enhance the credit union’s likelihood of long-term success.

TONY FERRIS is CEO of the Rochdale Paragon Group

This article initially appeared in Credit Union Directors Newsletter, which provides strategic insights for policymakers. Subscribe now to the print or PDF version.