It is critical to the success of any enterprise to recognize potentially destabilizing risks and be able to deal with them swiftly and effectively. A key component of that capacity is the CFO’s continuous assessment and monitoring of risks and proactive creation and implementation of risk mitigation strategies.
Enterprise Risk Management (ERM) or the continuous process of identifying, assessing and managing risks that may jeopardize an organization’s ability to achieve its strategic objectives is a key tool in managing risk
As COO & CFO of AARP, I’ve observed how an effective ERM process can do more than shield an organization from identified threats and risks. It can also help position the organization, whether large or small, for-profit or non-profit, to seize opportunities for innovation. Through ERM, we focus on the situations we want to avoid and the solutions we want to embrace.
A risk-based model should be utilized to determine the appropriate level of net assets or shareholders’ equity needed to meet risk appetite, along with continuous monitoring of risk mitigation relative to financial and strategic goals, and continuous monitoring and updating of scenario planning.
I should note the rapidly increasing role of analytics in planning and decision making. While analytics has been around for a while, it is only in recent years that there has been an explosion of systems and devices that generate data coupled with greatly reduced costs to collect, store, and analyze that data. Analytics have changed the way we make decisions. While we can’t rely solely on analytics, we’re clearly being made more aware of risks and our eyes and imaginations are being opened to new opportunities that might have slipped under the radar in the past. After all, risk management is not simply crisis management.
"As COO & CFO of AARP, I’ve observed how an effective ERM process can do more than shield an organization from identified threats and risks"
Indeed, excessive caution—born of an undue fear of risk— creates a risk in itself. It can produce stagnation, perhaps followed by a decline into irrelevance.
At AARP, we’re cognizant of the balance that needs to be struck. We put in place people and processes to minimize risk and to maximize opportunity through innovation.
To serve our 38 million members and change the way America views aging, we seek to shape the marketplace and public policy. Fulfilling that role requires openness to innovation. With ERM, we set up the guardrails that mitigate risk.
Our ERM policy proceeds from several guiding principles. It is a fluid process. It is integrated with our strategic planning process. It is based on an understanding of our Board’s appetite for risk.
It is important to have agreement between the Board and executive management so that everyone understands the strategy in support of the mission, the activities we are undertaking, and the risks, whether internal or external.
Several years ago, as we looked at the landscape of products and services focused on the fast-growing 50-plus population, we saw a huge gap between what was needed and what was available. Many of the innovations, especially in the health care field, that could help older adults remain independent were only in the early stages of development—or had not yet been conceived.
We concluded we could not simply sit back and hope change would come. We needed to lead change.
We created the AARP Innovation Fund, a first-of-its kind investment fund with $40 million in assets. The fund provides capital to innovative companies focused on improving the lives of people 50-plus and their families. Our goal is to spur innovative products and services in three areas: aging in place; convenience and access to health care; and preventative health.
We have partnered with J.P. Morgan Asset Management Private Equity Group to source and evaluate potential investments to the fund. To date, we have invested in five companies:
• a national leader in technology-enabled primary care;
• the Northeast’s preeminent online food retailer;
• an AI company with the goal of bringing consumer robotics into everyday life;
• a company that has developed an active suspension system that significantly reduces vehicle instability; • and a company that acquires regional eye care groups and independent optometry practices and drives value by improving operations and creating a high quality experience for patients.
Another way we are propelling innovation is by actively engaging accelerators, universities, and startups. We work with them to develop new offerings in support of our social mission. We provide mentoring support to startups including product feedback, knowledge sharing, and introductions. AARP does not provide direct funding to these startups but in some cases, we take an equity stake in the company.
We’re also seeding innovation in the critical area of dementia and Alzheimer’s disease. Last June, we launched the AARP Brain Health Fund and invested $60 million dollars in the Dementia Discovery Fund, which was set up to discover and develop breakthrough treatments for dementia. It targets perhaps the largest problem—and certainly the greatest fear— among aging Americans—dementia and Alzheimer’s disease. More than six million people in the U.S. suffer from dementia and Alzheimer’s disease. With no cure in sight, current projections say that number could increase to more than 16 million by 2050, or about one in five Americans 65 and older.
The Dementia Discovery Fund will help kick-start a different approach to dementia research and lead to the development of new therapies and, we fervently hope, a cure.
Building on the foundation of carefully designed, continuously assessed, and broadly accepted ERM, we are in a strong position to advance innovations that make life better for older adults.