What is Business Risk Management
Content
Okechukwu Onwuka, The Risk Professor
MD/CEO Business Risk Solutions, 07087814760
What is Risk Management?
What exactly is Business Risk Management and how can a good risk management system lead to great business performance? Risk Management is a system of processes that a company uses to identify, assess, quantify and control risks that could impair the achievement of defined business objectives. In reality, a business plan is a set of procedures and strategy developed to navigate through the risks associated with the business opportunity to increase the chances of success. These strategies are best developed following the findings of systematic risk assessments and evaluation. Effective risk management practices support an organization to achieve the following; • Asset Protection- Protect the business from avoidable adverse events or occurrences as well as recognizing potential opportunities that conform to the company’s management policy. Proper risk management strategies shield companies from risks arising from blind pursuit of untested market opportunities. By deviating from using traditionally stable collateral and security against loans, many banks succumbed to the temptation of using share certificates as collateral for funding increased activity in the stock market. The attraction of the quick profits from a stimulated stock market growth provided a very weak foundation for managers to jettison their fundamentals and plunge deep into trading in shares on the assumption that the upward price movement will never stop. Every entrepreneur must realize that each business opportunity is associated with risks. Carefully developing strategies for implementation significantly reduces the risk of failure. Direct plunge into the market without a strategy is recipe for disaster. Taking calculated risks is different from being rash. It must also be noted that there are alternatives that invested funds and resources can be applied, hence if you must deploy resources or assets in any area, it must be shielded from avoidable risks.
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Compliance- Ensures compliance with internal company management policies and external regulations by Government Agencies such as Central bank of Nigeria, Department of Petroleum
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© 2009 Okechukwu Onwuka The Risk Professor
Resources, etc. Violation of compliance requirements may lead to significant disruptions to operations and in some cases, outright closure.
•
Build Trust- by communicating the existence of strong values inculcated into regular principles and practice of effective risk assessment and management, customer and consumer confidence is boosted. People would rather do business with institutions they can trust. Enhance Sustainable profitability- Experienced managers are always cautious when emerging market trends in their industry generate huge returns on investment for almost any player. This is because the road to wealth and profits is never flat, common or popular. Effective risk management practices allow business managers to shield their operations from diverting to practices that expose them to high risks that are outside their control range. Although these might mean lower profits in the short run, the performance is more sustainable. As the positive momentum is sustained, geometric growth is likely to result from compounding effects over the years. Because risk management systems provide clear paths for business operations, it is easier to repeat successful processes for sustainability. Cost Savings- Good risk management systems save companies huge sums of money, time and resources. Timely risk assessments identify potential risks that if undetected may lead to very high mitigation costs if detected at an advanced stage of business or project implementation. A major satisfaction we get from the corporations we support is the significant cost savings that result from developing and implementing strategies for effective risk assessment and management systems. Unfortunately, many corporate executives see risk management as an irritant that only serves to assuage regulatory agencies instead appreciating the extremely valuable benefits to the organization. Manipulation difficulties- Where a risk management system is clearly documented and communicated to all employees and directors, it makes it difficult for any individual to manipulate or violate the codes. Even when you are the sole proprietor, your top staff members might give you hints when you tend to deviate. Usually, in risk management systems, only the highest level executives are authorized to waive risk acceptance guidelines for high risk activities but such waivers must be duly endorsed in writing. It is for this reason that senior executives are made liable for the negative consequences of any action taken on high risk investments, projects, credits or operations. Disrespect for the
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© 2009 Okechukwu Onwuka The Risk Professor
policies in a risk management system is as bad as a non-existent risk management process, if not worse. Basic Elements of a Risk Management System Risk Management is a definite, written and communicated process for identifying and managing risks. Consequently, it must have the five (5) basic elements of a standard management system.
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Objective- The primary purpose of establishing the system should be clearly defined. This objective can be classified into four broad areas namely: Financial risk, Environmental Risks, Risks to people (staff, public) and Public Reputation Risks. To define this objective as clearly as possible, A Risk Acceptance Criteria (RAC) must be stated for all areas of risk exposure. These definitions are usually represented on a risk matrix together with easy to use working definitions for parameters used in generating risk estimates. We’ll discuss the Process of establishing a corporation’s Risk Acceptance Criteria in the future articles. How- Policies & Procedures define the roadmap for achieving stated objectives. They identify standards, tools and techniques to be used in conducting risk analysis, risk estimation and guidelines for determining adequacy of preventive and mitigative safeguards or management controls Who- Accountable and Responsible Resources. These identify the people, job positions and experience required to implement the requirements as stated in the Policy and Procedure Manuals. The leadership of companies usually have the responsibility of driving development and compliance. Every employee must also know how they fit into the overall framework of risk control and compliance Verification & Measurement- There must be provision for periodic auditing of performance, verifying compliance, and identifying potential improvement opportunities. This process is of prime importance. Assessment teams and staff members should be encouraged to give candid feedbacks that would enhance the process. The challenge here is that employees who see their manager or supervisor as having little or no regard to risk management policies are more likely to impair the quality of audit and/or compliance. Reviews may be conducted annually or more frequently based on established industry practice and trend. Feedback- for improvements and upgrade. The senior management must be committed to respecting the findings of regular assessment teams and providing resources (Financial, time,
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© 2009 Okechukwu Onwuka The Risk Professor
etc) required to implement them and also steward the system upgrades that may result. A major challenge to risk management systems is innovation. Businesses are required to continually innovate to meet new dynamics in the market place and stay profitable. Managers come under severe pressure when the industry they operate in move sharply towards a new trend that yields instant profits. Keeping to established risk management practices may cast astute managers in bad light as underperforming compared to their contemporaries. Imagine the difficulties some managers would have faced during the hot profit days of the stock market boom by refusing to join the fray. Today, they are the winners for sticking to core ideals that guarantee sustainable profitability.
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© 2009 Okechukwu Onwuka The Risk Professor
MD/CEO Business Risk Solutions, 07087814760
What is Risk Management?
What exactly is Business Risk Management and how can a good risk management system lead to great business performance? Risk Management is a system of processes that a company uses to identify, assess, quantify and control risks that could impair the achievement of defined business objectives. In reality, a business plan is a set of procedures and strategy developed to navigate through the risks associated with the business opportunity to increase the chances of success. These strategies are best developed following the findings of systematic risk assessments and evaluation. Effective risk management practices support an organization to achieve the following; • Asset Protection- Protect the business from avoidable adverse events or occurrences as well as recognizing potential opportunities that conform to the company’s management policy. Proper risk management strategies shield companies from risks arising from blind pursuit of untested market opportunities. By deviating from using traditionally stable collateral and security against loans, many banks succumbed to the temptation of using share certificates as collateral for funding increased activity in the stock market. The attraction of the quick profits from a stimulated stock market growth provided a very weak foundation for managers to jettison their fundamentals and plunge deep into trading in shares on the assumption that the upward price movement will never stop. Every entrepreneur must realize that each business opportunity is associated with risks. Carefully developing strategies for implementation significantly reduces the risk of failure. Direct plunge into the market without a strategy is recipe for disaster. Taking calculated risks is different from being rash. It must also be noted that there are alternatives that invested funds and resources can be applied, hence if you must deploy resources or assets in any area, it must be shielded from avoidable risks.
•
Compliance- Ensures compliance with internal company management policies and external regulations by Government Agencies such as Central bank of Nigeria, Department of Petroleum
1
© 2009 Okechukwu Onwuka The Risk Professor
Resources, etc. Violation of compliance requirements may lead to significant disruptions to operations and in some cases, outright closure.
•
Build Trust- by communicating the existence of strong values inculcated into regular principles and practice of effective risk assessment and management, customer and consumer confidence is boosted. People would rather do business with institutions they can trust. Enhance Sustainable profitability- Experienced managers are always cautious when emerging market trends in their industry generate huge returns on investment for almost any player. This is because the road to wealth and profits is never flat, common or popular. Effective risk management practices allow business managers to shield their operations from diverting to practices that expose them to high risks that are outside their control range. Although these might mean lower profits in the short run, the performance is more sustainable. As the positive momentum is sustained, geometric growth is likely to result from compounding effects over the years. Because risk management systems provide clear paths for business operations, it is easier to repeat successful processes for sustainability. Cost Savings- Good risk management systems save companies huge sums of money, time and resources. Timely risk assessments identify potential risks that if undetected may lead to very high mitigation costs if detected at an advanced stage of business or project implementation. A major satisfaction we get from the corporations we support is the significant cost savings that result from developing and implementing strategies for effective risk assessment and management systems. Unfortunately, many corporate executives see risk management as an irritant that only serves to assuage regulatory agencies instead appreciating the extremely valuable benefits to the organization. Manipulation difficulties- Where a risk management system is clearly documented and communicated to all employees and directors, it makes it difficult for any individual to manipulate or violate the codes. Even when you are the sole proprietor, your top staff members might give you hints when you tend to deviate. Usually, in risk management systems, only the highest level executives are authorized to waive risk acceptance guidelines for high risk activities but such waivers must be duly endorsed in writing. It is for this reason that senior executives are made liable for the negative consequences of any action taken on high risk investments, projects, credits or operations. Disrespect for the
2
•
•
•
© 2009 Okechukwu Onwuka The Risk Professor
policies in a risk management system is as bad as a non-existent risk management process, if not worse. Basic Elements of a Risk Management System Risk Management is a definite, written and communicated process for identifying and managing risks. Consequently, it must have the five (5) basic elements of a standard management system.
•
Objective- The primary purpose of establishing the system should be clearly defined. This objective can be classified into four broad areas namely: Financial risk, Environmental Risks, Risks to people (staff, public) and Public Reputation Risks. To define this objective as clearly as possible, A Risk Acceptance Criteria (RAC) must be stated for all areas of risk exposure. These definitions are usually represented on a risk matrix together with easy to use working definitions for parameters used in generating risk estimates. We’ll discuss the Process of establishing a corporation’s Risk Acceptance Criteria in the future articles. How- Policies & Procedures define the roadmap for achieving stated objectives. They identify standards, tools and techniques to be used in conducting risk analysis, risk estimation and guidelines for determining adequacy of preventive and mitigative safeguards or management controls Who- Accountable and Responsible Resources. These identify the people, job positions and experience required to implement the requirements as stated in the Policy and Procedure Manuals. The leadership of companies usually have the responsibility of driving development and compliance. Every employee must also know how they fit into the overall framework of risk control and compliance Verification & Measurement- There must be provision for periodic auditing of performance, verifying compliance, and identifying potential improvement opportunities. This process is of prime importance. Assessment teams and staff members should be encouraged to give candid feedbacks that would enhance the process. The challenge here is that employees who see their manager or supervisor as having little or no regard to risk management policies are more likely to impair the quality of audit and/or compliance. Reviews may be conducted annually or more frequently based on established industry practice and trend. Feedback- for improvements and upgrade. The senior management must be committed to respecting the findings of regular assessment teams and providing resources (Financial, time,
3
•
•
•
•
© 2009 Okechukwu Onwuka The Risk Professor
etc) required to implement them and also steward the system upgrades that may result. A major challenge to risk management systems is innovation. Businesses are required to continually innovate to meet new dynamics in the market place and stay profitable. Managers come under severe pressure when the industry they operate in move sharply towards a new trend that yields instant profits. Keeping to established risk management practices may cast astute managers in bad light as underperforming compared to their contemporaries. Imagine the difficulties some managers would have faced during the hot profit days of the stock market boom by refusing to join the fray. Today, they are the winners for sticking to core ideals that guarantee sustainable profitability.
4
© 2009 Okechukwu Onwuka The Risk Professor
