best practices company of risk management essay
Best Practices in Risk Management for Companies
It is the presence of uncertainty that causes risk management to be such a pervasive concern. There is no organization or activity that is immune from risk management treatment. All have a responsibility to manage their exposure to risk. Their level of effort will, of course, vary considerably. Some organizations may require full-time staffs with a dedicated focus, while for others it may be a less central activity. Nonetheless, all organizations need to be in a position to make a formal acknowledgment of their exposure to risk and to confirm that they have given sufficient thought to what they can and should do about it.
The principal purpose of risk management is to identify and evaluate risks to the organization. In its most fundamental form, risk management deals with what could happen to prevent the organization from achieving its objectives, what could happen that could affect the organization’s ability to survive, and, ultimately, what could happen that could threaten the organization. Protection of the entity is a key feature of any risk management system. The necessity for risk management follows naturally from the existence of risks. Risks exist, to a large degree, because of uncertainty. The future is never crystal clear and, in the absence of perfect information, we must make decisions in a setting of risk.
The basic principles require that the practice of risk management should clearly be integrated with setting and achieving corporate objectives. Company directors must oversee the risk exposure of their companies, and compensation schemes should be tied to performance. The standard uses an outcomes-based approach to assess risks, including the specifics and attributes that make risk management a way of life and not merely a staff function. The degree of prudence, transparency, and disclosure, the balance between market and credit risks, and hence the capital adequacy that determines the creditworthiness of the company, and the use of policies and capital in the management of these risks.
To help companies understand the basic guidelines in dealing with complex issues such as risk and return, we have included in this document what we view as the best practices in risk management in order that our member-investors may have a quick guide of what to look for when they examine various sectors and companies. The following basic principles have been adopted from a document in risk management by the Group of Thirty, a non-profit international body composed of very senior practitioners and academics, representing private and public interest and focused on matters relating to international finances.
Furthermore, attention is drawn to the potential to manage risks with related tools such as the management reports, the risk management committee, external stakeholders, and associated entities.
In addition, the guidelines outlined in emphasize the governance performed by the board of directors and the executive committee, the shared vision and values of the company, management and assessment processes, transparency, engagement and confidence in all stakeholders, and finally the continuous improvement in the management of business risks. It is also highlighted in this context the role of financial information tools, internal control and good corporate governance that favors a value-creation perspective.
Increase awareness among business leaders so that they understand that managing risks allows them to take advantage of business opportunities in a conscious way. Establish risk management strategies and align them with strategic objectives and policy of the company. Assign responsibility for risks to functional and operational areas in order to establish management measures and limit response to acceptable levels. Allocate financial resources to manage the most significant risks. Spread the culture of risk management among workers of all levels.
One group of themes is widely shared and includes the development of a risk management strategy which reflects the company’s distinctive risk profile, the use of a robust, effective risk assessment process, the active participation of business unit leadership in risk control, and a governance structure which champions and ensures the implementation of an integrated company-wide view of risk. However, these high-level themes can be realized in many different ways. To make clear the path to real-world success, we have organized our case studies into five sections. Different companies contacted with widely different environments – whether regulatory, economic, competitive, or organizational. To put as many different risk perspectives into practice, it is imperative that the company employs a risk management approach that integrates as many deferred venues as required to address the identified risks.
According to research on the best practices in risk management, companies that have successfully implemented more integrated forms of risk management have done so by adopting a number of strategies. In this section, we present examples of companies that demonstrate such best practices. In highlighting what they have achieved, we bring to life core themes of integrated risk management success.
This chapter completes the proof established along the book, leading to conclusions and potential future line of work. Many points ultimately stemming from the unique question tackled in each chapter overshadow the underlying ones. In the case of the conclusions, the strong point at the end of the book is that risk, particularly in a real, practical, and business world, is a complex notion that is in general very difficult to deal with in terms of fairly valuating it. This tension is, for example, what explains the well-known mispricing of insurance. By the nature of their economic activities, companies own some pieces of the broader risk and only some strategies are available to disassociate from it. Focusing on such set of companies, we have made a survey of tidbits of principles dealing with risk management, originating from diverse alternatives, different in objectives, methods, and, particularly, in the resulting instruments.
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