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Lack of Internal Alignment and Commitment

of Resources to Manage Risk Threaten


Corporate Business Performance
Global Survey of Executives Exposes Critical Areas of Concern for CEOs
and Their Management Teams

Impact of Operational Risk on Business


Performance
Companies today face a number of challenges to
achieving success and growth. A dynamic global
economy, increased utilization of rapidly developing
technologies and available data, and an unpredictable
regulatory environment all combine, with numerous
other factors, to make charting the waters of business
performance a challenging endeavor for executives.
As a result, it is increasingly important that companies
today invest manpower and financial resources
appropriately to improve their business performance
and, in turn, enhance their competitiveness in the
global marketplace.

But to what extent are companies incorporating risk For example, many large, catastrophic accidents
into their planning? While some of the top risks increase after significant declines in oil prices.
preoccupying CEOs today include terrorism, trade, According to Marsh Research, the top 100 losses in
climate change or regulatory policies, to name a few, 2015 were more than US$33 billion with an average
these are not risks directly within their control to loss above $130 million. Though these catastrophic
influence top and bottom line growth. Instead, better events occurred for different reasons, they fit the
understanding operational risks across their company’s pattern of how the decline in oil prices can impact
entire value chain can enable CEOs to create and extract business decisions relating to risk.
new value from emerging opportunities.
With this in mind, DuPont Sustainable Solutions
These operational risks come in a variety of shapes (DSS) conducted a global survey of executives across
and sizes, including workplace health and safety, a range of high-hazard industries to determine their
environment, quality control, process safety, supply perceptions of how risk is identified and managed
chain disruptions, maintenance and reliability within their companies, and to what extent it is
challenges, production fluctuations, and integrity and incorporated into corporate objectives and goals. The
asset management. Their impact on business goals is vital survey findings indicate many executives appear to
introspection for executives, especially when considering be clamoring for better ways to integrate operational
future investments or cuts to current budgets. risk management into their business performance.

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Executives’ Views of Operational Risk Three specific findings stand out. While 90 percent
Management of executives believe leadership commitment is
Findings from the DSS survey reveal that executives important to effectively manage risk, only 38 percent
acknowledge the operational risk management consider it to be a strong component of their risk
processes within their companies are not sufficient. management system today. Likewise, 88 percent feel
workforce engagement is important to risk management,
Two findings are particularly alarming: yet only 35 percent currently consider it a strong
component in their organizations. Also, while 80 percent
1. Executives recognize they are not devoting of executives understand that organizational culture is
enough resources and capabilities to effectively important to effective risk management, just 21 percent
manage risks within their companies, which feel it is a strong component in their company’s risk
threatens their continued right to operate. management system.

2. Executives acknowledge there is a significant It is no wonder that three of every four executives
organizational disconnect and misalignment (75 percent) felt operational risks in their companies were
among leadership and employees with respect to inadequately managed. More than one-third felt they did
risk management, which greatly contributes to not have an adequate understanding of operational risks
the likelihood of a catastrophic event. within their organizations, that there are critical gaps in
their existing operational risk management processes,
Ineffective Risk Management and that there is a lack of capability in their company to
According to the survey, there is a vast gap execute established operational risk processes.
between what executives consider to be important
components of successful risk management, and how These findings are especially alarming for companies,
effectively their companies are implementing those because the potential implications, from down time,
essential components (see Figure 1). worker injury and possible fines to loss of life and right to
operate, are significant.

FIGURE 1: IMPORTANT FACTORS IN MANAGING RISK

90% 89% 88% 88% 84% 86%


80%

38% 35%
28% 28% 29% 30%
21%

Leadership Risk Risk ID & Workforce Competency & Organization All


Commitment Governance Assessment Engagement Capability Culture

% } IMPORTANT/
% } VERYSTRONG/
of respondents of respondents who feel
who feel element is current state of element
VERY IMPORTANT in their organization is STRONG

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Organizational Misalignment to Manage Risk down to all staff. But this is a two-way street. Not
In addition to acknowledging insufficient risk only does the CEO need to be clear about his/her
management within their companies, executives also risk vision, but front-line staff also need to be able to
realize there are significant organizational disconnects communicate the operational risks that they see to
among all personnel that have a negative impact on their management and leadership, otherwise executives
effective risk management, according to the survey will not have an adequate understanding of risks that
(see Figure 2). exist on the shop floor and on the process line. Front-
line personnel understand operational risks better
than others throughout the organization as they have
FIGURE 2: ALIGNMENT WITHIN ROLE to deal with these risks in their daily work activities.
Companies should harvest the knowledge of front-
line personnel to better identify risk and feed the
80% consolidated results to leaders.
64% 61% This two-way engagement will ensure consistent
54% understanding of top risks across the company and
45% promote an alignment in understanding operational
risks. This alignment will enable the effective
prioritization of resources for risk reduction.

Unless companies devote sufficient resources to the


Senior Middle Front-Line Front-Line All
Executives Managers Supervisors Operators critical components of successful risk management and
better align the organization to a culture committed to

% of respondents who feel there is


alignment between roles
risk reduction across the entire value chain, operational
risks will continue to negatively impact their overall
business performance.
Generally speaking, 44 percent of executives identified
leader-workforce misalignment as the biggest challenge
in risk management within their organization, a
concern that is made all the more clear when various
FIGURE3:
roles within the company are examined (see Figure SIGNIFICANT CHALLENGES IN MANAGING RISKS
3). Eight of every 10 executives (80 percent) feel that
senior executives are aligned in their understanding of
the top operational risks within their organization, but
only 45 percent feel that front-line operators have such
level of alignment (see Figure 2).
44%
Leader/Workforce
Misalignment
43%
Performance
Management

These are significant findings and a cause for alarm.


The perception among surveyed executives that front-
line workers are not as aligned as senior leaders in their
understanding of top risks is a general indication that
there is an engagement gap between leaders and front-
40% Capability
39% Mindset &
Behavior
line personnel within the organization.

If senior executives and front-line staff have different


perceptions of risk, it means that the CEO is not
adequately propagating his risk vision and message
36%
Processes
40%
All

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Bridging the Gap: Effectively Managing To do this, it is critical that operational risk
Risk to Create Value management processes are institutionalized
Companies can better manage their operational horizontally across the company, which means breaking
risks and improve their business performance by information-sharing silos between departments
adopting an integrated approach that links together and business units. And the same operational risk
business performance, understanding of risk and management processes must be communicated
organizational culture (see Figure 4). vertically, from senior executives to front-line staff, to
ensure that risk information is shared freely up and
Business Performance down the management chain.
Business performance can be greatly improved if
risk management processes are appropriately aligned Understand Risks
to business performance objectives. It is critical Understanding risks helps better manage business
that companies understand, at a deeper level, the performance, but it is important that companies focus
operational risks they face in order to meet business on obtaining the correct data to determine what their
objectives. Using data more effectively can help unique operational risks actually are. Boards must be
executives better identify and manage risk. Data will careful not to fall into relying upon easily measurable
help them to focus on key operational risks that have data instead of getting real insight into their operations
the greatest impact and not waste time and resources so that they can make the best decisions. The first step
on background noise. is not only to look at safety risks, but also at critical
operational risks that impact operational performance.

FIGURE 4: IMPROVING SUSTAINABLE BUSINESS PERFORMANCE


NON-EXHAUSTIVE

Align risk processes Connect operational


to business risks to business
objectives operations

Use data to more


effectively identify BUSINESS UNDERSTAND Enhance operational
risk mgt. processes
and manage risk PERFORMANCE RISKS
Prioritize operational Elevate risk awareness
risks with of everyone
maximum impact in organization

Institutionalize Look at risk across


operational ORGANIZATION departments and
risk processes functions
CULTURE

Demonstrate Increase Link organizational


leadership Advance risk
executive culture into
commitment capability
accountability daily operations

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FIGURE 5: TOPICS DISCUSSED IN BOARD MEETINGS
MOST DISCUSSED TOPICS LEAST DISCUSSED TOPICS
IN BOARD MEETING IN BOARD MEETING

55%
of respondents

Financial
44%
of respondents

Asset integrity/reliability
Safety, health, environment Contractor management
Regulatory compliance Process safety
Supply chain

It is interesting to look at the most discussed and least systems, but should take key data from existing
discussed topics at Board meetings (see Figure 5). processes and data streams and combine them into a
Of course, financial, safety, health, and environment forward-looking view of risks. These leading indicators
statistics, and regulatory compliance are de rigueur. will help educate all levels of management of the
But it is quite interesting that process safety is one operational risks with the most impact and align teams
of the least discussed topics. Other topics that to better manage them. A robust operational risk
are infrequently discussed are maintenance and management process will evaluate risk across the entire
reliability trends, asset integrity and even supply chain company – horizontally and vertically.
disruptions. This is a worrisome theme in that Boards
are segregating statistical tracking of HSE events and Organizational Culture
regulatory compliance from process and operational/ Because organizational culture is the glue that connects
production deviations. disparate parts of the company and its functions, it
must be part of the solution. Developing a risk mindset
It is important that the Board understands, manages will help employees anticipate and proactively manage
and owns its top operational risks in the same way risk to prevent adverse consequences on a day-to-day
that it manages and owns its financial risks, regardless basis. The importance of truly showing leadership
of regulatory requirements and performance. Good commitment cannot be overemphasized. Too many
performance does not necessarily mean zero risks. times, CEOs and other senior executives talk about
Understanding risks helps the Board proactively culture, but they don’t “walk the talk” and demonstrate
identify performance trends that could lead to the importance of safety through their actions.
operations disruptions, instead of being reactive to
events and incidents. Without a good understanding of Executives must not only be held accountable to meet
operational risks, the Board falls victim to the “illusion business performance goals, but also in identifying,
of performance” where performance indicators may evaluating, prioritizing, and managing operational
show positive trends, but risks remain hidden, waiting risks in the company. It is important to more strongly
to strike anytime, surprising everyone in the future. link organizational culture into daily operations and
make it part of the cultural fabric of the company.
Creating a robust operational risk management process Improving individual and team capabilities in
should not replicate or create new management operational risk management will help enable and
institutionalize this cultural change.

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GLOBAL RISK SURVEY RESPONDENT DEMOGRAPHICS

• Leading high-hazard industry businesses were invited to participate in the survey.

• Representative responses across high-hazard industries including: oil & gas, chemical/ petrochemical,
utilities, metals and mining, manufacturing, building and construction, and transportation.

• Results were compiled through internet submittals.

• Over 80 respondents globally.

• Over 60% of the respondents are at Business Unit Executive Director to the CEO level.

• Respondents represented companies with approximately USD $300 billion in annual revenue, with more
than half having over $1B in sales and a quarter over $10B in annual revenue.

• Over 60% of the companies have global operations.

Nicholas Bahr is the Global Practice Leader for Operational Risk Management, DSS. nicholas.bahr@dupont.com
Alfonsius Ariawan is Global Implementation Architect, DSS. alfonsius.b.ariawan@dupont.com

About DuPont Sustainable Solutions


DuPont Sustainable Solutions (DSS), a business unit of DowDuPont Specialty Products, is a leading provider of
world-class operations management consulting services to help organizations transform and optimize their processes,
technologies and capabilities. DSS is committed to improving the safety, productivity and sustainability
of organizations around the world. Additional information is available at: www.sustainablesolutions.dupont.com

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