Integration of risk issue into management control

Decisions are made usually with the lack of complete information – as was mentioned previously there can be indicated that managers are characterized by ignorance regarding future situation of the business environment. That is why risk should be considered during preparation of any action. Management control should provide useful information to managers, based on appropriate models and tools, creating the basis for solving decision problems. Information concerning risk arising in very turbulent environment that is characterized by VUCA is extremely important for future existence of company. Hence, there is crucial to secure the integration of risk management with management structures towards the integration and centralization of risk-taking control and the analysis of the effectiveness. It is an important driver of sustainable creation of future profitability.

VUCA is an acronym for the English words: unpredictability, uncertainty, complexity and ambiguity. This concept was developed by the American Military Academy in the late 1990s and describes a rapidly changing and increasingly complex world. VUCA began soon to be used by the business to analyze the confrontation with a constantly changing reality. VUCA is directly related to the management and risk management, describing the business environment characterized by randomness and rapid changes. VUCA word requires from managers the development of new patterns of thinking to act efficiently in the increasingly turbulent environment.

The role of management control is extremely important because there should be created in the company the mechanism of risk consideration mechanisms as part of planning, defining goals, securing resources for decisions implementation, performance management and steering the goals’ execution. As shown in Rieg et. al. (2021) the following management control developments should be implemented:

● definition in plans the objectives for risk-taking - goals are the basic tool to control the desired managers’ behavior, supporting the execution of the company's plans. Consistency of the management control system should be improved by adjusting the set of objectives management with risk measures (e.g. risk exposure limits, risk response costs, targets for risk adjusted performance measurement), linking them with existing control instruments and the incentive system. The increase of the certainty of achieving the strategic and operational objectives results from the limitation the risk exposure and achievement planned risk-return profile;

● operationalization of risk objectives by measures related to financial planning - the implemented measures should define the required value of the measure and the permissible deviation from the target. Management control should also define the system of monitoring the execution of the target values at risk as the part of the company's objectives system and initiate the corrective actions defending the target level;

● plans development towards stochastic approach – operating in turbulent environment requires the change from a deterministic approach to planning towards stochastic approach based on the risk analysis (identification of risks and assessment of its impact on the achievement of the company's objectives), setting a corridor of possible deviations of the company's results (positive deviations, negative deviations) from the plans. The range of potential values of economic profits should be identified and translated into risk limits and risk reaction instruments for each option. Plan should be designed as a set of options, controlled by risk measures and application of risk reaction instruments for each alternative - the acceptable cost of risk reaction should be planned based on the result of risk analysis;

● analysis of possible deviations from plans - risk materialization always leads to deviations from plans. The result at risk should be valuated for the by owners defined probability (confidence level), securing the safety of the plans execution;

● risk-adjusted performance measurement (RAPM) – the integration of the risk issues into the measurement of results and the assessment of managers' decisions. The performance measurement is developed by risk capital, necessary to finance risk-taking[4];

● consideration of risk in strategic controlling and strategy operationalization - development of the Balanced Scorecard (BSC) with key risk data, valuation of capital costs for given company unit based on risk analysis and consideration of risk data as the basis for evaluation in incentive systems.

The integration of risk and finance should secure efficiency of risk taking. The managerial information will not provide relevant information regarding the real picture of the financial situation of the company without linking the profitability measurement with the risk impact. Forecasted results should be connected to the volatility of risk factors affecting the success of a company, which should improve the efficiency of resources usage and increase the creation of value added.