Effective risk management systems are crucial for companies, irrespective of their size and sector/ industry. These alone can help mitigate potential losses and protect the company from the adverse impact of unexpected events. Risk management involves identifying, assessing, and prioritizing risks, and implementing strategies to mitigate them.
Risks are a daily occurrence in most businesses. Hence it very crucial to put in place systems to control or mitigate them effectively. Risks, if not identified and dealt with at the right time, could turn into unanticipated major incidents, which may result in losses or damage the reputation of the company.
Many companies have a narrow and rigid approach to risk management. This usually does not account for the complexities of the business. COVID-19 pandemic was one such rare occurrence which caught almost all companies off-guard. How quickly some companies were able to identify the risks, and attempt to mitigate them, showed how good the risk management frameworks of such companies were. For others, this exposed the company to various risks, not limited to financial, operational, legal or business risks.
Risk Management is crucial for the companies for the following reasons:
Ensuring continuity of operations: Effective risk management helps in ensuring that critical business processes and operations are not interrupted by unexpected events.
Enhancing decision making: Effective risk management provides a better understanding of potential risks and their impact. Risk management helps the decision-makers take more informed decisions.
Minimizing Loss: Risk management helps in identifying potential risks and developing strategies in advance to mitigate or eliminate them. This helps in reducing the severity of losses.
Improving financial stability: Risk management can help organizations avoid financial losses and maintain stability, which is crucial for long-term success.
Protecting reputation and increasing stakeholder confidence: Reputation is an integral part of any organization. Managing risks effectively at the appropriate time can help protect an organization’s reputation and maintain stakeholder trust with investors, customers, and regulators.
Complying with legal and regulatory requirements: Compliance with legal and regulatory requirements is crucial for avoiding penalties and ensuring that companies operate in an ethical and responsible manner.
It is important for companies to have an effective risk management framework to up their risk management game. Some steps that companies can undertake are:
Setting up a Risk Management Committee (RMC): The RMC is a Board-level committee consisting of members of Board and senior management, and tasked with developing and implementing a risk management framework. The committee is also responsible for monitoring and reporting on the effectiveness of risk management strategies and ensuring that appropriate controls are in place to manage risks.
Establishing an effective risk management framework: The framework, as developed by the RMC, should cover all areas of the business, including operational, financial, legal, and strategic risks, and should involve regular risk assessments and audits, the development of risk mitigation strategies, and continuous monitoring and reporting of risks.
Developing an all-inclusive risk management plan: Companies should formulate a detailed plan outlining their approach towards risk management, including identification of risks, assessment of their impact, and the implementation of strategies to manage the risks.
Establishing a risk appetite: A company’s risk appetite refers to the level of risk that the company is willing to accept. Being cautious can help a company avoid losses, but it can also lead to missed opportunities for growth and innovation. On the other hand, taking excessive risks could harm the company’s reputation, financial performance, and overall sustainability. Therefore, it is crucial for companies to strike a balance between taking risks and managing them effectively.
Maintaining a risk register: Maintaining a risk register and updating it periodically are essentials for effective risk management. A well-maintained risk register can provide valuable insights that enable companies to better understand their overall risk exposure and make informed decisions about how to manage risks proactively.
Classifying risks based on likelihood and impact: Likelihood refers to the probability of a risk event occurring, while impact refers to the severity of the event if it were to occur. This approach helps shall help in prioritising risks based on the probability of occurrence and the potential impact.
Appointing a Chief Risk Officer (CRO): The CRO is responsible for overseeing the development and implementation of risk management strategies. The CRO works closely with other senior executives to ensure that risks are identified and managed appropriately.
Identifying a process owner for mitigation of every identified risk: There should be a process owner who should be held accountable for his/her efforts for mitigating risks.
Engaging in continuous risk assessment: Risk management is an ongoing and a continuous process that requires companies to assess the risks on a regular basis and form a strategy and action plan accordingly. Companies should undertake continuous assessment of risks to identify new risks, if any.
Engaging with internal audit team: A good internal audit function and risk management function go hand in hand in identifying and mitigating risks.
Investing in risk management tools and technologies: Technology can be a powerful tool for managing risk. Artificial intelligence, and data analytics are helping organizations go beyond the old ways of managing risks, by using technology to detect, predict, and prevent risks in high-risk situations. Companies should invest in risk management software and other technologies that can help them identify and manage risks more efficiently.
Convening RMC meetings regularly: Having RMC meetings at regular intervals helps in reviewing the status of the company’s risk management plan, identifying emerging risks, evaluating existing risks, and developing risk mitigation strategies. While Regulations do not mandate a quarterly meeting of the RMC, it is a good idea for companies to have meetings every quarter.
Prioritizing employee training and education: Companies should prioritize employee training and education on risk management. Employees should be educated on the risks facing the company, the strategies to mitigate them, and their roles and responsibilities in implementing the strategies.
Fostering a culture of risk awareness: Risk management should be deep-rooted in the company’s culture. Companies should encourage employees to speak up if they identify potential risks thereby promoting a culture of continuous improvement in risk management practices.
Effective risk management requires a proactive and systematic approach that involves all levels of the organization. By prioritizing risk management and implementing best practices, companies can better protect themselves and their stakeholders from potential risks and uncertainties.
Shikha Shah