What is Corporate Risk?
Risks are involved in almost every phase of a business. Whether it is recruiting a new team or acquiring a new business to increase the market, risks can come in any shape. Most of the businesses strive to avoid financial uncertainty, strategic management errors, legal liabilities, natural disasters, accidents, IT security, etc.
The risk management department chalks a plan to reduce such risks beforehand and make a contingency plan ready. Foreseeing and understanding the risks are the prime functions of that team. It includes experienced professionals from different departments of a business so that every aspect of risk can be met with precision. The prime motive of this department is to mitigate the loss linked to risk and save the company from a huge financial burden ahead.
Importance of Risk Management
A business runs on an investment. The risks endanger the financial stability of a business. This is why every company must have a risk management section to fortify the future of a business by preparing resources or plans to tackle upcoming threats.
The other advantages are mentioned below:
- Creation of a proper work environment to make employees and customers feel safe and secure.
- Fortifying the foundation of a business and its operations.
- Reducing the level of legal liability and unnecessary risks.
- Plans to protect every entity, from assets to people, linked to the company.
- Establishing the insurance needs of an organization and reducing the number of premiums.
How can a company make it a brilliant plan? Virginia Mason Medical Center, Seattle, showed significant development in the risk management section. The authority dedicatedly increased transparency in the system and introduced excellent terms in the patient safety segment. It also made risk mitigation, reporting, and disclosure more transparent. This helped the patient
parties to understand the terms and act accordingly. In this way, Virginia Mason Medical Center witnessed a significant reduction in paying professional premiums and a considerable increase in reporting responsibility among the employees.
Steps involved in Risk Management
Statista shows the types of business risks a company faces across the world. From cybercrimes to regulatory changes, anything can turn out to be a risk for a business. Whether a business is big or small, here is how it can plan to meet risks with proper resources.
i) Context establishment
This is the first step of risk management where a team will figure out the circumstances giving birth to a particular risk and threaten the integrity of a company. These criteria will be used for the evaluation of risks. It will also help in structuring the analysis.
Raghuram G. Rajan, Ex-Governor-RBI, said - “Not taking risks one doesn't understand, is often the best form of risk management.” Understanding the risks is the first step in risk management.
ii) Risk Identification
Risk can go undetected for a long period imparting too much harm to a company. Its identification is of prime importance. It is necessary to find out the extent of the negative impact of a risk or threat on business operations.
iii) Risk evaluation and assessment
Risk evaluation means evaluating the extent of possible loss and determining the risk exposure. Companies have a predefined risk appetite, that is based on the nature of business. After an evaluation of risk, decisions are based on whether the risk falls within the risk appetite of the company.
iv) Risk Response/Mitigation
This is the part of management where risks are ranked and steps are formulated to mitigate them. These plans are formed as risk prevention tactics or contingency plans.
After implementing the risk response, the management of an organization monitors the risk response and determines if the outcomes are as expected. If a risk response is not effective and the risk has not been mitigated, the management will go back to identifying another appropriate risk response.
Specific approaches to Risk Management
Once the risks are identified, the process should be implemented as chalked out. Stepwise implementation and monitoring will lead to apt mitigation of the risks and minimization of loss. The reaction of a company is also decided by the type of threat or risk it is facing/foreseeing.
i) Avoiding risks
It is obvious that all risks cannot be mitigated or met with proper resources. Some risks need to be avoided at any cost. Disruptive consequences can occur when every risk is considered to be eradicated.
ii) Risk reduction
Some risks cannot be totally mitigated. Only the impact can be reduced. The team will adjust certain aspects of a project plan or a business operation to reduce the threat level.
iii) Sharing risks
It can also happen that the effect of risks is shared between different projects and departments. Hence, this type of risk can be mitigated with partners, vendors, and stakeholders. Financial risk management is done with other entities in the same business.
iv) Retaining risks
This might sound bizarre to a common ear. Companies can stick to risks as they might be worth a fortune later. Companies will have to analyze the risk level and potential fallouts/consequences and then decide to retain them. In this case, the threats are calculated against the opportunities or rewards a risk can deliver.
Daniel Wagner, Founder-Country Risk Solutions, said - “Some risks that are thought to be unknown are not unknown. With some foresight and critical thought, some risks that at first glance may seem unforeseen, can in fact be foreseen. Armed with the right set of tools, procedures, knowledge, and insight, light can be shed on variables that lead to risk, allowing us to manage them.”
Every regulatory body of industry has set certain standards that companies have to comply with. Regulatory compliance has a particular section mentioned for risk management protocols. Internal audits, risk analysis, and other processes should be done regularly to stick to such protocols. Regulatory bodies such as the International Organization for Standardization (ISO) provide certain ways to reduce risk. The majority of clients and customers trust ISO-certified companies.
Following these standards is mandatory for companies these days. There are many examples where companies gained a lot from managing risks excellently. Contingency plans and preparedness are the prime pillars of a risk management department. The benefits of proper risk management plans can save a company from unprecedented disasters.