Risk

Risk
Part 1
Risk
• Risk: the ‘chance of exposure to the adverse consequences of uncertain future
events’
• Risk awareness: the ability of an investor to recognise and measure the risk associated
with it
Importance Of Risk Management
Risks Vary By Sector
• Different business environment
• Different business models
• Different financial structures, strategies and cost bases

Risk Appetite
“the amount of risk an organization is willing to accept”
It comprises two key elements:
(i) the level of risk which the company’s directors consider desirable
and
(ii) the capacity of the company to actually bear the level of risk.
Embedding Risk
• Risk awareness embedded throughout the organization at all levels in order to manage
risk effectively.
• Risk management is not a stand-alone activity- it is normal behavior

Embedding Risk
How can risk be embedded?
1. A visible policy on risk awareness supported by the management
2. Open communication and a supportive culture
3. Establish formal systems such as a risk committee and a risk auditing
4. Embedded into human resource systems
5. Publicise success stories in the company and to reward risk awareness behaviour
6. Maintain a risk register

Risk
Part 2
Different Types Of Risks
Strategic Risks
Arise from the fundamental decisions that directors take concerning an organisation’s
objectives
If they occur, force a change in strategic direction of the organisation.

Operational Risks
Risks connected with the internal resources, systems, processes, and employees of the
organization
That would impact the organization’s ability to achieve the current strategy.
Strategic Vs. Operational- Simplified!
'things that will affect our ability to reach our intended destination'
Vs
'threats to keeping the factory running'

Financial Risks
Which arise from the way a business is financially structured, its management of working
capital and its management of short and long-term debt financing.

Business Risks
 Which can threaten the survival of the business as a whole and they can arise from many
sources.
 Essentially they arise because of the business model which an organisation operates and
the strategies it pursues.

Business Risks (Financial, Operational, Compliance)
 Financial risks
 Credit risks
 Market risk
 Financial market risk
 Liquidity risk
 Exchange rate risk
 Interest rate risk
 Legal and compliance risk
 Political risk
 Technology risk
 Health and safety risk
 Environmental risk
 Fraud risk
 Intellectual property risk

 Reputational risk
 Business probity risk
 Entrepreneurial risk
 Trading risk
Risk
Part 3
The Risk Management Process
Risk Management Process
Identify
Assess
Manage
Report
Monitor
Step 1: Identify Risks
Step 2: Analyze/Assess Risks
Consequences (impact or hazard)
Low High
Likelihood/ Low
Probability
High
Heat Map
Risk Perception
• Risk perception :The belief about the chance of a risk occurring and/or about the extent,
magnitude, and timing of its effects.
• If likelihood and/or impact can be measured with scientific accuracy then we can say that
the risk can be objectively assessed.
• In many cases, however risk problems can be ‘messy’ and it can be difficult to accurately
assign a value to a likelihood or an impact. This is where subjective judgments can be used
Step 3: Manage(Response to Risks-TARA)
Transfer ( share) Avoid
Risk Strategies
Reduce (mitigate) Accept

Risk Diversification
Adjusting the balance of activities so that the company is less exposed to the risky activities
and has a wider range of activities over which to spread risk and return.
As Low As Reasonably Practical ( ALARP)
• There is an inverse relationship between risks and their acceptability
• ALARP relates to the level of risks which are unavoidable and so should be controlled.
• there must be a reasonable proportion between the quantum of risk and the costs incurred
for mitigating the risk.
• if there is a significant disproportion between the two variables the cost incurred cannot be
considered as “ALARP”.
Risk Correlation
 Related risks: One type of risk can give rise to another
 Risk correlation/covariance: Risks vary together (negative or positive correlation)

Step 4: Risk Reporting
Include in the annual report:
 Measures taken by the board to address risks
 Risks resulting in a material error in the financial statements are reported by the auditor in
the audit report.

Step 5: Monitoring Risk-Risk Audit
Risk identification
Risk assessment
Review of controls over risk
Report
Risk
Part 4
Risk Committee - Roles
• Recommendation to the board of a risk management strategy
• Reviewing reports on key risks
• Advising the board on risk appetite and acceptable risk tolerances
• Advising the board on all high-level risk matters
• Monitoring overall exposure to risk
• Informing shareholders, and other key stakeholders, of any significant changes to the
company’s risk profile.

Roles Of Risk Manager
• Providing overall leadership, vision and direction
• Developing and promoting RM competences, systems, culture, procedures, protocols
and patterns of behavior
• Reporting on the above to management and risk committee as appropriate
• Ensuring compliance with relevant codes, regulations, statutes

Managing The Upside Of Risk
Historically the focus of risk management has been on preventing loss.
However, recently, organizations are viewing risk management in a different way, so that:
• Risks are seen as opportunities to be seized
• Accepting some uncertainty in order to benefit from higher rewards associated with higher
risk
• Identify risks associated with new opportunities
• Effective risk management is being seen as a way of enhancing shareholder value by
improving performance
Risk And Competitive Advantage
Risk
Low High
Low A B
Competitive
advantage
Accept all such opportunities Avoid these risks
High C D
Look for these opportunities in Assess these business
business and build up on these opportunities very cautiously

Risk

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Risk

• Risk: the ‘chance of exposure to the adverse consequences of uncertain future

• Different business models

• Different financial structures, strategies and cost bases

“the amount of risk an organization is willing to accept”

It comprises two key elements:

• Risk management is not a stand-alone activity- it is normal behavior

1. A visible policy on risk awareness supported by the management

2. Open communication and a supportive culture

3. Establish formal systems such as a risk committee and a risk auditing

4. Embedded into human resource systems

6. Maintain a risk register

If they occur, force a change in strategic direction of the organisation.

'threats to keeping the factory running'

capital and its management of short and long-term debt financing.

the strategies it pursues.

 Financial market risk

 Interest rate risk

 Legal and compliance risk

 Health and safety risk

 Intellectual property risk

 Business probity risk

Consequences (impact or hazard)

magnitude, and timing of its effects.

the risk can be objectively assessed.

Transfer ( share) Avoid

Reduce (mitigate) Accept

• There is an inverse relationship between risks and their acceptability

for mitigating the risk.

 Related risks: One type of risk can give rise to another

 Risk correlation/covariance: Risks vary together (negative or positive correlation)

Include in the annual report:

 Measures taken by the board to address risks

the audit report.

Review of controls over risk

• Reviewing reports on key risks

• Advising the board on risk appetite and acceptable risk tolerances

• Advising the board on all high-level risk matters

• Monitoring overall exposure to risk

company’s risk profile.

• Providing overall leadership, vision and direction

• Developing and promoting RM competences, systems, culture, procedures, protocols

and patterns of behavior

• Reporting on the above to management and risk committee as appropriate

• Ensuring compliance with relevant codes, regulations, statutes

• Risks are seen as opportunities to be seized

• Identify risks associated with new opportunities

• Effective risk management is being seen as a way of enhancing shareholder value by

Accept all such opportunities Avoid these risks

Look for these opportunities in Assess these business

business and build up on these opportunities very cautiously

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