The priority of our organisation with respect to risk mapping, is to help our operations master a tool where they can 1) identify, 2) analyse, 3) prioritise, 4) decide upon risk mitigating actions, and 5) follow-up the risks that threatens the objectives of the operation,

Bringing in a communicative tool by quantifying the risks would surely improve our work. But, first our operations needs to master the basics.

On aggregated level, quantifying is done, however not used as a decision making tool, (except for investments/projects).

Best regards
Anton Arnesen
Chief Risk Officer, Elkem

Most strategic risks are not either/or – but can more or less validly/easily be described as combinations of likelihood and impact (e.g. the risk of delivery failure. To most, it is very likely that it will happen with some – minr – level of delivery, byt highly unlikely it’ll completely destroy the companie’s overall deliverability – and there is a range of combinations in between).

In order to simulate, we must have one shared (figure based) set of scales on likelihood and impact for all risks – and we must have some “notion” of the combination of the two. actually, in a lot of cases, we may gain valuable insights from making the effort of assessing this systematically. We should – in this context – also remember that evets may happen from which we benefit, and some even, when we are hurt short term, but benefit long term (e.g. a commidity price increase is a short term risk, but when it hurts your competitors and/or substitute products more than it hurts you – it supports your competitive advantage).

The result of multiplying likelihood and impact will provide you with the “average loss over a million years”. To risk management, this amount is NOT truly interesting as we wish to manage the exposure, not the cost base (did you go for the cost base alone, you would never ever buy an insurance). To calculate/find the combined exposure – you also need to simulate (the “million possible years”) using e.g. Monte Carlo simulation – and then look at your 5% or 1%, or whatever you decide, level of peak exposure – and compare that with your risk appetite.

Some Monte Carlo software tools provide a “tornado” diagramme as a result of the simulation. A chart where the most important risks are shown in prioritized order – and “voila” you have identified the top risks to address and a guide as to which risks you may wish to mitigate further in order to limit your overall exposure.

This is a field of much new thinking, and to date, only rather limited business implementation. As a Strategic Risk Manager – I am working on implementing and improving this step by step – but as the Line of Business (who own the risks, and have to do the job) also have other priorities – it is going to take a while. However, I am confident each step add true value to the company.

Best regards
Hans Læssøe
Senior Director, Strategic Risk Management
The LEGO Group

I am somehow puzzled : how can the WACC be larger than the cost of equity, since the cost of debt is lower ?