Exclusive insights into risk management

One main consequence of the economic crisis is that many executives are starting to recognize that single risks can only be evaluated realistically in interaction with other risks. Risks should no longer be regarded as isolated, but be identified, analyzed and controlled within the framework of all interacting risks. As recent studies have confirmed, almost every company looks at these risks in isolation. During the past years, separate subsystems have developed in many companies, for example, on account of legal requirements for the management of risk. These companies look at single risk ranges, for example, Treasury or Compliance. The dependence between these risks often remains unnoticed.

Up until today, risk management has placed its main focus on avoiding the recurrence of mistakes made in the past. The fact that basic conditions can quickly change, such as competitive environments or raw materials prices, are often forgotten. Structures for a company’s risk management as well as models and methods for risk management which are based on established, statistical and technical experiences do not always consider the constant changes in the market environment and in the company structure. What is often missing is a logical alignment of risk management with strategic business goals.

How to set risk management goals

The challenge for a company is to bring together its established subsystems with the goal to develop an integrated, company-wide risk management system with dynamic structures. To make the risk management function, it must orientate itself not only to the
goals of the company, but also to its strategy and culture. The goal a company wants to achieve with its risk management strategy must be compatible with the overall business objectives. Parallel, lessons learnt from risk management can also lead to an adaptation of the business’ objectives and corporate strategy.

Influences on risk management

The industry in which a company acts and the business model are other factors of influence for a company-wide risk management model. For a company in the chemical industry, for example, environment protection orders have a high value. In the insurance
industry the minimum requirements influence risk management (MaRisk VA) as the risk management must be followed and are monitored.

Finally, companies must look at the complete risk sphere in which they exist. Beside the classical risks which can be of strategic, financial and operational nature or concern the legal environment, so-called emerging risks must be also considered. Emerging risks are global risks which are difficult to predict, such as climate change, political instability or volatile energy prices.

If you want to delve deeper into different aspects of risk management, read “Enterprise Risk Management” written by Prof. Dr. Olaf Passenheim.