What everybody ought to know about risk management

Inefficient or even lack of risk management often costs companies their very existence. Unfortunately, risk management is merely looked upon by many companies as a legal necessity rather than a value-adding strategy. Besides, as the use is not recognized, often Enterprise Risk Management (ERM) is only performed to fulfill regulatory requirements for risk management, with minimum expenses. Such an approach neglects the fact that ignored risks can become an enormous expense factor. Although you have to admit that the effort involved in establishing a well-defined and well-running enterprise risk management system is enormous, it is definitely worth paying.

Shareholder and stakeholder values are maximized if executives marry strategies and approaches which allow an optimum balance between turnover, growth and profit with the associated risks. A financially effective insertion of resources within the organization can be achieved. Enterprise risk management includes:

• Alignment of risk and strategy – executives consider the risk incline of the organisation by the assessment of strategic alternatives and by the development of mechanisms towards the control of the risks.

• Improvement from risk-based decisions – enterprise risk management provides alternatives in case a risk is detected – risk avoidance, risk reduction, risk distribution and risk acceptance.

• Reduction in surprises and losses in the business environment – organizations improve their ability to recognize possible events and to initiate counteractive measures as well as to reduce surprises and the expenses or losses involved with them.

• Determination and control of multiple and cross-company risks – every company faces a huge number of risks in which several departments are concerned. Parallel to this, company-wide risk management allows effective reactions dependent on each other as well as on general measures with multiple risks.

• Use of chances – considering all possible events allows executives to recognize chances and to react proactively.

• Improved capital allocation – reliable risk information permits executives to assess the capital and to attract investors.

Enterprise risk management is an ongoing process and many managers have learned their lesson the hard way: risk never sleeps.

Learn about the future of R.M.

In the near future the pressure on companies will further rise to realize additional measures for risk management. The American stock market supervisory body, SEC, today requires from every company an annual report which states the company’s position with regard to specific risks within the industry and the company. One can assume that the European supervisory authorities will soon make similar regulations. The general risk consciousness of people and organizations is on the rise.

How does management react? Ordinarily one tries to absorb risks with a back-up system. However, the more complex a system is, the higher the risk.

It is not advised to improve existing systems bit-by-bit and constantly, as new and easier systems are available to us. Hopefully, in the future, risk management will serve to screw back not only complexity, but to develop new, easier systems which are basically as safe as traditional structures.

If you want to learn more about this wide topic, read “Enterprise Risk Management” by Prof. Dr. Olaf Passenheim.

Download the free eBook “Enterprise Risk Management” right here