Many organisations lack the processes to identify and assess risk accurately. Performance targets invariably suffer

Boards are too ambitious and don’t consider risk when setting performance targets, according to research. A report by the Economist Intelligence Unit found that almost three-quarters of global executives worked for organisations in which the balance of risk and opportunity was skewed disproportionately towards opportunity. Most organisations, it suggests, lack the processes to correctly identify and assess risk, reducing the effectiveness of performance targets.

The research, sponsored by Oracle, appears to indicate a discord between board-imposed targets and managers’ belief in the feasibility of those targets. The more optimistic the performance target, the greater the level of managerial cynicism. As two respondents noted in response to a question about what they had learned from the downturn, “it’s important to have a scapegoat ready”. Setting targets that don’t account for risk are more likely to deliver excuses than results, found the report.

Almost half of respondents cited increased understanding of business uncertainties as the main benefit of integrating risk and performance. But around a third of the executives polled reported that at their organisations the business case for integrating risk and performance would be difficult to make. “Risk is still a silo at our firm,” confirmed one.

“People at the top of the company set objectives, but they seldom see all the risks that may jeopardise achievement of the goals,” says Economist Intelligence Unit senior editor Dan Armstrong. “It is difficult to create realistic performance goals without incorporating knowledge from those working in the ranks—those closest to customers and suppliers.”