Risk is the part of every business, whether it is of financial nature or non-financial nature. Thus, management of risk is very important. Risk management includes risk identification, analyzing the risk factors, making an assessment of the risk, and mitigation of the risk. Better risk management techniques provide early warning signals so that the same may be addressed in time. In this era of fast-changing global economy, the Risk management Strategy has gained utmost importance.
To effectively manage risk, and seize the opportunity within every challenge, institutions must manage a variety of business dimensions. It has become necessary to focus on maximizing digital capabilities, building ongoing expertise, driving fluid collaboration, developing top-notch analytics and fostering a risk culture that can withstand disruptive change.
Risk Management is a part of the corporate strategy. It is a key management tool to safeguard the business assets for its use for productive purposes. Risk Management is a logical and systematic process of establishing the context, identifying, analyzing, evaluating, treating, monitoring and communicating risks associated with any activity, function or process, in a way that enables an organization to minimize losses and maximize opportunities.
Risk mitigation is defined as taking steps to reduce adverse effects. Risk mitigation is the process by which an organization introduces specific measures to minimize or eliminate unacceptable risks associated with its operations. Risk mitigation measures can be directed towards reducing the severity of risk consequences, reducing the probability of the risk materializing, or reducing the organization’s exposure to the risk. The risk mitigation step involves development of mitigation plans designed to manage, eliminate, or reduce risk to an acceptable level.
Possible risk mitigation strategies are: Avoid the risk, not taking the action that may generate it; Accept the risk, in the case the organization, while well aware of the risk, decides to go ahead and perform the operation that may end in the risk event occurring; Transfer the risk, for example, insuring the business against the occurrence of that risk event; and Reduce the risk, taking steps to lower either the probability of the risk event happening or the amount of the damage.
Risk governance includes the skills, infrastructure (i.e., organization structure, controls and information systems), and culture deployed as directors exercise their oversight. Good risk governance provides clearly defined accountability, authority, and communication/reporting mechanisms. A process for risk management cannot be initiated unless there is a perception and knowledge of risk surrounding the business. Businesses are exposed to changing dynamics of the external environment. Hence it is important to have the risk oversight function, as one of the areas of responsibility of the board of directors of any enterprise. The Board may form a separate committee to support the board function depending on the complexities of the business enterprise and the complexities associated with its transactions and events. Therefore, the Board has to define a risk philosophy and the extent to which it is willing to accept any consequence of taking of risks by the organization and its functionaries in its day to day functioning. A strengthened management information system (MIS) supported by robust information technology platform is a necessary pre-requisite for enhancing Board efficiency in oversight and decision making. Similarly, augmented skill sets and experience at the level of independent directors would go a long way in enhancing the Board capacity. Strong MIS facilitates risk reporting to the boards in an effective and comprehensive manner, which in turn enhances transparency and causes informed decision taking. Robust information technology systems are a necessary condition for supporting the MIS framework as the quality of risk information that the Boards and the top management receive depends largely on the quality and robustness of the information technology systems. MIS Improve an organization’s operational efficiency, add value to existing products, cause innovation and new product development, and help managers make better decisions. The availability of customer data and feedback can help the company to align its business processes according to the needs of its customers. The effective management of customer data can help the company to perform direct marketing and promotion activities.
A risk management policy serves two main purposes: to identify, reduce and prevent undesirable incidents or outcomes and to review past incidents and implement changes to prevent or reduce future incidents. A risk management policy should include the following:
- Risk management and internal control objectives
- Statement of the attitude of the organization to risk
- Description of the risk-aware culture or control environment
- Level and nature of risk that is acceptable
- Risk management organization and arrangements
- Details of procedures for risk recognition and ranking
- List of documentation for analyzing and reporting risk
- Risk mitigation requirements and control mechanisms
- Allocation of risk management roles and responsibilities
- Risk management training topics and priorities
- Criteria for monitoring and benchmarking of risks
- Allocation of appropriate resources to risk management
- Risk activities and risk priorities for the coming year
Thus, effective risk governance needs a structure that assures the integration of technical expertise, regulatory requirements, and public values. These different inputs should be combined to the best knowledge available in the field and to the plurality of values that govern the judgment of desirability for oneself and society as a whole. A sound system of risk management and internal controls contributes to the safeguarding of the company’s assets and consequently shareholders’ investment.