What is Business Risk Management

8/3/2019 What is Business Risk Management

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Okechukwu Onwuka,

The Risk Professor

MD/CEO Business Risk Solutions, 07087814760

What is Risk Management?What is Risk Management?

What exactly is Business Risk Management and how can a good riskmanagement system lead to great business performance?

Risk Management is a system of processes that a company uses toidentify, assess, quantify and control risks that could impair the

achievement of defined business objectives. In reality, a business plan is aset of procedures and strategy developed to navigate through the risksassociated 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 achievethe following;

• Asset Protection- Protect the business from avoidable adverseevents or occurrences as well as recognizing potential opportunitiesthat conform to the company’s management policy. Proper riskmanagement strategies shield companies from risks arising fromblind pursuit of untested market opportunities. By deviating fromusing traditionally stable collateral and security against loans, manybanks succumbed to the temptation of using share certificates ascollateral for funding increased activity in the stock market. Theattraction of the quick profits from a stimulated stock market growthprovided a very weak foundation for managers to jettison theirfundamentals and plunge deep into trading in shares on theassumption that the upward price movement will never stop.

Every entrepreneur must realize that each business opportunity isassociated with risks. Carefully developing strategies forimplementation significantly reduces the risk of failure. Directplunge into the market without a strategy is recipe for disaster. Taking calculated risks is different from being rash. It must also benoted that there are alternatives that invested funds and resourcescan be applied, hence if you must deploy resources or assets in anyarea, it must be shielded from avoidable risks.

• Compliance- Ensures compliance with internal companymanagement policies and external regulations by Government

Agencies such as Central bank of Nigeria, Department of Petroleum

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Resources, etc. Violation of compliance requirements may lead tosignificant disruptions to operations and in some cases, outrightclosure.

• Build Trust- by communicating the existence of strong values

inculcated into regular principles and practice of effective riskassessment and management, customer and consumer confidenceis boosted. People would rather do business with institutions theycan trust.

• Enhance Sustainable profitability- Experienced managers arealways cautious when emerging market trends in their industrygenerate huge returns on investment for almost any player. This isbecause the road to wealth and profits is never flat, common orpopular. Effective risk management practices allow businessmanagers to shield their operations from diverting to practices thatexpose them to high risks that are outside their control range.Although these might mean lower profits in the short run, theperformance is more sustainable. As the positive momentum issustained, geometric growth is likely to result from compoundingeffects over the years. Because risk management systems provideclear paths for business operations, it is easier to repeat successfulprocesses for sustainability.

• Cost Savings- Good risk management systems save companies

huge sums of money, time and resources. Timely risk assessmentsidentify potential risks that if undetected may lead to very highmitigation costs if detected at an advanced stage of business orproject implementation. A major satisfaction we get from thecorporations we support is the significant cost savings that resultfrom developing and implementing strategies for effective riskassessment and management systems. Unfortunately, manycorporate executives see risk management as an irritant that onlyserves to assuage regulatory agencies instead appreciating theextremely valuable benefits to the organization.

• Manipulation difficulties- Where a risk management system isclearly documented and communicated to all employees anddirectors, it makes it difficult for any individual to manipulate orviolate the codes. Even when you are the sole proprietor, your topstaff members might give you hints when you tend to deviate.Usually, in risk management systems, only the highest levelexecutives are authorized to waive risk acceptance guidelines forhigh risk activities but such waivers must be duly endorsed inwriting. It is for this reason that senior executives are made liablefor the negative consequences of any action taken on high riskinvestments, projects, credits or operations. Disrespect for the

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policies in a risk management system is as bad as a non-existentrisk management process, if not worse.

Basic Elements of a Risk Management SystemRisk 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 shouldbe clearly defined. This objective can be classified into four broadareas namely: Financial risk, Environmental Risks, Risks to people(staff, public) and Public Reputation Risks. To define this objectiveas clearly as possible, A Risk Acceptance Criteria (RAC) must bestated for all areas of risk exposure. These definitions are usuallyrepresented on a risk matrix together with easy to use workingdefinitions for parameters used in generating risk estimates. We’lldiscuss the Process of establishing a corporation’s Risk AcceptanceCriteria in the future articles.

• How- Policies & Procedures define the roadmap for achieving statedobjectives. They identify standards, tools and techniques to be usedin conducting risk analysis, risk estimation and guidelines fordetermining adequacy of preventive and mitigative safeguards ormanagement controls

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Who- Accountable and Responsible Resources. These identify thepeople, job positions and experience required to implement therequirements as stated in the Policy and Procedure Manuals. Theleadership of companies usually have the responsibility of drivingdevelopment and compliance. Every employee must also know howthey fit into the overall framework of risk control and compliance

• Verification & Measurement- There must be provision forperiodic auditing of performance, verifying compliance, andidentifying potential improvement opportunities. This process is of

prime importance. Assessment teams and staff members should beencouraged to give candid feedbacks that would enhance theprocess. The challenge here is that employees who see theirmanager or supervisor as having little or no regard to riskmanagement policies are more likely to impair the quality of auditand/or compliance. Reviews may be conducted annually or morefrequently based on established industry practice and trend.

• Feedback - for improvements and upgrade. The seniormanagement must be committed to respecting the findings of

regular assessment teams and providing resources (Financial, time,

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etc) required to implement them and also steward the systemupgrades that may result.

A major challenge to risk management systems is innovation. Businessesare required to continually innovate to meet new dynamics in the market

place and stay profitable. Managers come under severe pressure whenthe industry they operate in move sharply towards a new trend that yieldsinstant profits. Keeping to established risk management practices maycast astute managers in bad light as underperforming compared to theircontemporaries. Imagine the difficulties some managers would have facedduring the hot profit days of the stock market boom by refusing to join thefray. Today, they are the winners for sticking to core ideals that guaranteesustainable profitability.

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What is Business Risk Management

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