Both optimists and pessimists contribute to our society. The optimist invents the airplane and the pessimist the parachute. ~Gil Stern
Leading an organization always is a balancing act between innovative opportunities boosting strategic objectives (the optimistic view) and risks threatening strategic objectives (the pessimistic view). This dilemma makes strategic alignment a central concept of any management discipline. Of course, this is also the case for ERM as Gartner analyst Paul P. Proctor :
Successful risk management is all about connection with business strategy, so if you put people in a role as risk managers who don’t understand anything about business strategy, they’re not going to be very effective communicators.
Breaking your corporate strategy down into measurable objectives is an integral part of any strategy development approach. In a balanced scorecard, for example, you define your strategic objectives across different perspectives and specify them through measures and initiatives. This sets the optimal path for implementing a business strategy. However, you may also see your strategic objectives be related with critical success factors that you cannot influence. Take weather conditions, financial markets or security levels as some examples. Thus, those critical success factors translate into risks that need to be tackled even in the most optimistic case. On the other hand strategic quality management approaches strategic objectives from a rather pessimistic point of view. The underlying assumption of Six Sigma for example is that there always will be defects and suboptimal process outcomes. Yet, it aims to reduce those defects to a minimum and keep the deviation among outcomes minimal.
The equilibrium between those two views materializes in the determination of an enterprise’s risk appetite. The authors of the COSO thought paper put this as follows
“By balancing risk exposures with the entity’s overall appetite for risks, management and the board are able to align the organization’s activities to achieve objectives with the underlying risks that are attached to those activities.”
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