This document discusses key aspects of risk management including:
1) Risk in the context of corporate governance and the responsibilities of directors to establish appropriate risk controls and monitor risks.
2) The responsibilities of a risk manager in identifying risks, adopting risk protection measures, and developing risk management policies and procedures.
3) The five steps of the risk management process: identify risks, determine acceptable risk levels, analyze risks, plan for risks, and monitor risks.
4) How risk assessments must be dynamic and change with the environment or organizational changes like new products or legislation.
5) The concept of risk appetite which describes an entity's willingness to take on risk in exchange for potential higher returns.
This document discusses key aspects of risk management including:
1) Risk in the context of corporate governance and the responsibilities of directors to establish appropriate risk controls and monitor risks.
2) The responsibilities of a risk manager in identifying risks, adopting risk protection measures, and developing risk management policies and procedures.
3) The five steps of the risk management process: identify risks, determine acceptable risk levels, analyze risks, plan for risks, and monitor risks.
4) How risk assessments must be dynamic and change with the environment or organizational changes like new products or legislation.
5) The concept of risk appetite which describes an entity's willingness to take on risk in exchange for potential higher returns.
This document discusses key aspects of risk management including:
1) Risk in the context of corporate governance and the responsibilities of directors to establish appropriate risk controls and monitor risks.
2) The responsibilities of a risk manager in identifying risks, adopting risk protection measures, and developing risk management policies and procedures.
3) The five steps of the risk management process: identify risks, determine acceptable risk levels, analyze risks, plan for risks, and monitor risks.
4) How risk assessments must be dynamic and change with the environment or organizational changes like new products or legislation.
5) The concept of risk appetite which describes an entity's willingness to take on risk in exchange for potential higher returns.
This document discusses key aspects of risk management including:
1) Risk in the context of corporate governance and the responsibilities of directors to establish appropriate risk controls and monitor risks.
2) The responsibilities of a risk manager in identifying risks, adopting risk protection measures, and developing risk management policies and procedures.
3) The five steps of the risk management process: identify risks, determine acceptable risk levels, analyze risks, plan for risks, and monitor risks.
4) How risk assessments must be dynamic and change with the environment or organizational changes like new products or legislation.
5) The concept of risk appetite which describes an entity's willingness to take on risk in exchange for potential higher returns.
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C1- Risk and the risk management process
Risk in the context of corporate governance
Management responsibilities in risk management Risk Management Process Changing risk assessments Risk Appetite
Risk in the context of corporate governance
Risk This is present when future events occur with measurable probability
Risk and Corporate Governance
One link between risk and corporate governance is the shareholders' concerns about the relationship between the level of risks and the returns achieved. Another is the link between directors' remuneration and risks taken. If remuneration does not link directly with risk levels, but does link with turnover and profits achieved, directors could decide that the company should bear risk levels that are higher than shareholders deem desirable. It has therefore been necessary to find other ways of ensuring that directors pay sufficient attention to risk management and do not take excessive risks. Corporate governance guidelines require directors to:
Establish appropriate control mechanisms for dealing with the risks the organisation faces Monitor risks themselves by regular review and a wider annual review Disclose their risk management processes in the accounts
Management responsibilities in risk management
The Risk Manager is responsible to Senior Management for the following functions: 1. To identify and quantify the organisations exposures to accidental loss. 2. To adopt proper financial protection measures through risk transfer (to outside parties), risk avoidance, and risk retention programs.
3. To develop and update a complete system for recording, monitoring, and
communicating the organisations Risk Management program components 4. To develop and implement loss prevention/loss retention programs. 5. To establish Risk Management policies and procedures
Risk and the risk management process
5 step process: 1. Identify Risk Make list of potential risks continually. Identify risks facing the company - through consultation with stakeholders 2. Decide on acceptable risk Decide on acceptable risk - and the loss of return/ extra costs associated with reduced risks 3. Analyse Risk Prioritise according to threat/likelihood. Assess the likelihood of the risk occurring - management attention obviously on the higher probability risks 4. Plan for Risk Look at how impact of these risks can be minimised - through consultation with affected parties. Avoid or make contingency plans (TARA) 5. Monitor Risk Assess risks continually. Understand the costs involved in the internal controls set up to manage these risks - and weighed against the benefits
Why do all this?
To ensure best use is made of opportunities
Risks are opportunities to be siezed Can help enhance shareholder value
Changing risk assessments
The belief that risks do not change very much is only true in static environments. In reality, the changeability of risks depends upon the organisations place on a continuum between highly dynamic and completely static. Risk assessment is a dynamic management activity because of changes in the organisational environment and because of changes in the activities and operations of the organisation which interact with that environment.
Examples: 1. A new product launch The new product will obviously introduce a new risk that was not present prior to the new product. It may be a potential liability from the use of the product or a potential loss from the materials used in its production. 2. A change in legislation Changes in the environment might include changes in any of the PEST (political, economic, social, technological) or any industry level change such as a change in the competitive behaviour of suppliers, buyers or competitors. In either case, new risks can be introduced, existing ones can become more likely or have a higher impact, or the opposite (they may disappear or become less important). The best way of initiating a change management risk assessment is by dividing all the things that come under the scope of the change management program into three groups: 1) Items that remain the same after the change Examples of this category include patents, building and machinery, key personnel, and other capital assets. Such items normally do not pose any risks during the change management process. 2) Items poised to change This includes assets that have no value to the companys core business. This includes outdated equipment, space that is standing idle, underused positions in the company, redundant processes, and even redundant staff.
Replacing or eliminating such items either reduce expenses or enhances revenue
flow. Risk assessment for this second list need to focus on: ensuring such items are really not needed for the companys core processes 3) Items that could go either way The major scope of risk assessment lies in this group of items, to determine whether possible changes in such items pose a risk to the organisation. The best approach towards risk-assessment for items in this third list is through effecting a trade-off. For instance, curtailing the assembly line might curtail expenses and lead to better operating efficiency, but it might come as loss of morale to staff and loss of prestige owing to running a reduced set up. Risk assessment entails comparing the benefits of efficiency with the losses owing to loss of morale and prestige. Risk Appetite Risk appetite describes the willingness of an entity to become exposed to an unrealised loss (risk). It is usually understood to mean the position taken with regard to two notional preferences: 1. Risk aversion 2. Risk seeking. Both preferences are associated with different levels of returns: those that are risk-seeking favour higher risks and higher returns with the converse being true for the risk averse. Risk-averse entities will tend to be cautious about accepting risk, preferring to avoid risk, to share it or to reduce it. In exchange, they are willing to accept a lower level of return. Those with an appetite for risk will tend to accept and seek out risk, recognising risk to be associated with higher net returns.
