The Greatest Risk of Risk Management

January 30, 2018 08:15 AM
 

Do you practice risk management in a manner that empowers your advisors, employees, and bankers to participate in protecting your operation? This isn’t a question of “are you smart enough?” It’s a question of “how do you think and practice?” when you work with internal and external advisors.

We partner with producers and production teams characterized by vastly diverse age groups, financial capacity, professional experience, geographic location, and education. And we’ve come to an astonishing conclusion: rarely does a failure of technical understanding or intellect compromise risk management practices. Our clients are smart—mavericks, pioneers, entrepreneurs, innovators and brilliant people, and these people generally make us smarter. That’s a driving directive of our business: we are smarter together.

Unfortunately, intelligence doesn’t translate into creating and implementing solid risk management strategies. Something’s missing, and, based our experience, that “something” is fairly consistent regardless of a client’s scope and scale, professional background, or financial profile.

When risk management recommendations are proposed to producers, their teams, or their CFO, and they fail to consistently implement strategies, it means they either don’t trust the advice or don’t trust themselves, and this puts them at risk. 

Advisors make recommendations because they believe, given what they know, that the markets warrant specific protection practices. Protection and profitability are the value delivered, or in other words, the “what client’s get” as a result of the relationship. Yet many producers admit they have been reluctant to act on recommendations at times.

Hesitancy is Common
Failure to respond to advice is more common that you might expect—even among producers of significant influence. You know your risk management relationship is not working if you are not getting deliverable value. If you are engaged in any business that requires hedging production, you have a vested interest in understanding fostering behaviors that magnify risk management advising and execution. 

Consider going through this exercise as you look at your risk management beliefs, behaviors and relationships:

  1. Evaluate outcomes:  is your operation realizing the value of risk management advising?
  2. Expose the cause: what operational behaviors, beliefs, and protocols prevent effective participation in making good risk management decisions?
  3. Evaluate the nature of your risk managers: do you, your bankers, and the members or your advisory team have the behavioral capacity to lead risk management?
  4. Understand the science: what causes human beings to be poor risk managers?
  5. Perfect the “how”: what beliefs, behaviors, and practices should you shift to be more effective?

In follow-up commentaries, we’ll look at each of these steps separately and thoroughly, to help you understand behaviors and ultimately make better business decisions.

Editor’s Note: Karen Kerns is CEO of Kerns & Associates, a risk management firm serving agriculture in Ames, Iowa. The company employs a holistic approach to agricultural risk management, operating as an extension of clients' operations to ultimately enhance their customers’ profitability. For more information, call 515.268.8888, or go to http://www.kerns-associates.com/

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