As organizations expand their risk appetite heading into the new year, enterprise risk management leaders face the prospect that their organization’s decision-makers have learned the wrong lessons from operating in the pandemic. Amid considerable information overload, senior executives faced a continuous stream of critical business decisions that required quick responses as the onset of lockdowns began, from implementing remote work policies to digitizing legacy products, services and operations.
The apparent success—thus far—of many of these ad-hoc decisions presents ERM leaders with a key challenge moving forward: restoring process discipline before it is too late.
Bigger Decisions, Made More Quickly
Executives have much to be proud of regarding the results of many quick-fire decisions and their organization’s health heading into 2022, but it is important to note that the full impacts of many of these decisions have not yet been fully realized.
One example of unintended consequences arises from the new working models that many lauded throughout the pandemic. Despite the apparent success of an abrupt shift to remote work, an acute talent shortage and a historically high “quits rate”—which some have termed “the Great Resignation”—is now a major challenge for organizations. In fact, heads of ERM told Gartner that their top concern for 2022 is managing talent risk, including related concerns about workforce planning and maintaining organizational culture.
Gartner research found that one in five senior decision-makers regretted a significant business decision within one year of making it. If this statistic serves as a benchmark for typical decision-maker behavior, further data shows how the level of regret could accelerate in short order: 57% of organizations have indicated that they plan to increase their risk appetite next year or had already in 2021.
As organizations embrace a higher level of risk, those responsible for making significant business decisions have indicated they increasingly rely on “gut instinct” rather than the key criteria required for sound decision-making processes. Among executives responsible for significant business decisions, 64% told Gartner they have sped up their decision-making process as a result of operating in the pandemic, while 48% admitted to a less rigorous process when making these decisions.
Restoring Risk-Informed Decision-Making in 2022
The disconnect with how decision-makers currently operate starts with ERM executives’ own perceptions. When Gartner asked ERM leaders how often significant business decisions were made in their organizations without meeting key ERM criteria, these executives estimated it occurred just 23% of the time. A separate survey of business decision-makers demonstrated the reality: 69% of significant business decisions were not risk-informed.
Organizations face potentially steeper consequences from such decisions. According to Gartner’s analysis, nearly one in three decisions at the senior executive level can have an adverse effect on key stakeholders, and 19% of decisions made at this level could invite increased regulatory scrutiny.
For ERM leaders seeking to rein in such behavior before it accelerates, there are two potential strategies when engaging with business decision-makers. The traditional response has been to provide more and better information to executives in an attempt to increase their risk awareness. While this approach improves risk-informed decisions, it also exacerbates information overload, a key driver of problematic decision-making. The result is that decisions are more risk-informed, but the quality of the decisions is still no better than before.
An alternative approach to simply adding more information to the decision-maker’s plate is called “sense-making.” This approach focuses on helping executives better understand the risk information currently in front of them. When tested against the traditional approach of providing more and better information, the sense-making approach showed similar results in increasing risk-informed decision-making behavior, but unlike the first approach, significantly improved decision quality. This is largely due to sense-making’s ability to alleviate the sense of information overload that has driven faster and less rigorous decision-making since the start of the pandemic.
The sense-making strategy acknowledges that decision-makers increasingly have their own access to information sources that will likely influence their decisions, regardless of the criteria established by the ERM team. It also accounts for the rapidly growing assurance landscape and related biases decision-makers may have toward assurance functions.
The sense-making strategy relies on four key elements:
1. Synthesizing risk information from disparate sources. A root cause of information overload occurs when decision-makers are faced with disparate sources of information without relevant context on their credibility. ERM can play a lead role in guiding decision-makers on how to weigh information from various sources and can provide needed context to risk information.
2. Prioritizing the most relevant risk information. The traditional approach of ranking risks by their importance to the enterprise often lacks guidance on the potential trade-offs among multiple risks. A better approach is to bring key considerations to the forefront so decision-makers can clearly weigh those against other priorities.
3. Helping decision-makers apply risk information in context. The checklists and frameworks ERM professionals typically rely on can be helpful with general process adherence but are insufficient for tailoring guidance to specific decisions. ERM needs to develop tools written in their organization’s language so decision-makers more clearly understand how the information applies to their specific situations.
4. Preparing decision-makers to make sense of risk information independently. Rather than attempting to limit the risk information decision-makers access or to rely solely on reviews of risk appetite statements, ERM should implement training to enable decision-makers to be able to process and apply risk information independently.
After studying the decisions of 370 senior decision-makers in 2021 and comparing the two main approaches, the sense-making strategy led to a 38% improvement in business decision outcomes compared with providing more and better information, which had no measurable effect on decision quality. As information overload is a key factor in poor decision-making today, providing business leaders with more information is clearly not the remedy.
While ERM professionals have a full slate of pressing priorities in 2022, helping senior executives improve the quality of their most significant business decisions should be near the top of the agenda. A sense-making approach to risk can be applied to any key decision they face and has the potential to improve both near-term and longer-term results for the business.