The Two Headed Coin

CHAPTER 6Enterprise Risk Management and Competitive Advantage

Once the appropriate risk-governance framework and supporting processes are in place to identify, measure, assess, monitor, and report risks, the organization needs to decide which risks to keep. Clearly the risks that the firm should retain are the ones that are related to the value in its value proposition, which in turn links to its reputation and hence competitive advantage. Because the purchaser will compare the value proposition offered to competing offers, there is a market limitation on the price or the organization's downside risk that the customer will accept, as we discussed previously. Investors, however, are only prepared to accept limitations on the buffer against uncertainty. So, there is a market limitation on capital structure.¹ But for now, we simply want to recognize the importance of risk and uncertainty in creating value for the customer and the firm. As with many other topics in this book, value creation for the customer must be balanced against value claiming by the firm to compensate its stakeholders.

Although we recognize the importance of shareholders, we prefer the broader use of stakeholders because it recognizes the importance of the social license to operate that is essential to sustainable success and the importance of which is increasingly recognized by institutional investors, such as BlackRock founder and CEO, Larry Fink.² Moreover, consumers and customers are increasingly considering ...