Risk Management Structure: To Magnify Shareholders’ Value

by Rutuja shah Digital Marketing

A whole assemblage of risks and opportunities emerge daily, both from within and outside a business. When it comes to risk, remember this classic golden rule, “Things which have never happened before, happen very often.” Having a single definition of risk is becoming harder by the day. Until date, the succinct definition of risk given by the ISO 31000 standard linked to managing risk is the “effect of uncertainty on objectives”. A positive or negative deviation from the anticipated result is called an effect.

However, this definition does not address the irregular nature of risk. Managing risk becomes a challenging task to accomplish due to its recurrence and severity.

While credit, operational, market, liquidity, business, strategic and reputational risks encompass the various types of risk, they do not describe all the possible risks that an organization can or could face. In recent times, several corporations were not successful even after having a risk management system in place. This shows that those organizations failed to perceive the dynamic nature of risk.

Though it is imperative to have a single, holistic view of the risk factors, a wide range of risk evaluation tools are present in the market for organizations to take remedial informed judgements. This enables an organization to conduct a complete risk assessment with critical information on financial data, legal events, corporate subsidiary trees, and other third-party information. Complete data in a single place aids managers learn and understand the patterns that arise across a portfolio.

But how important is risk management as a structure and can it be implemented in a workplace beyond theory? Today, risk management has become the most important framework to craft and put into use. A sound credit risk management system aids in risk-return trade-off, which is crucial for an enterprise to thrive and advance. Opportunities and uncertainties come in pairs, and that is a fact. A strong risk management structure also provides an essential reason for an enterprise to overcome challenges.

Building Blocks of Risk Management Framework:

A common risk management structure consists of three parts. Primarily, possible events that may affect the organization need to be recognized. Then, the linked uncertainties and growth opportunities need to be handled. Finally, fair insurance is essential for the accomplishment of organizational objectives and goals.

The risk management structure varies across enterprises. For example, "BASEL" framework for banks that several enterprises adopt. A risk management framework covers entire enterprises and establishes the responsibility of risk in a top-down manner. In such a structure, accountability originates from the board of directors. Particular obligations of risks are allotted to heads of organization and a chief risk officer (CRO) manages at the operational level. The integral part of the process here is a risk function leadership team.

An essential part of this framework is that it does not operate in silos but is an integrated strategy. The key focus sectors of this strategy towards risk management are risk response, control exercises that an organization forms, data and intelligence within an organization, and oversight and monitoring.

Due to these reasons, building a risk culture is necessary within an organization. Risk culture is the practice of values and behaviors present in an industry that moulds the risk decisions of the administration and employees.

To conclude, note that risk management does not alleviate risk entirely. It aids an industry to reach its goals by anticipating for unfavorable uncertainties. It helps an enterprise gain faith in business stakeholders. The ultimate goal reached by risk management is the enrichment of stakeholders' value.