IMPORTANCE OF RISK MANAGEMENT
Governance functions include planning and budgeting, performance measurement, assurance and auditing, procurement, hiring, assessing staff as well as control over all day-to-day operations. The management of an organization, enabled by its governance arrangements, can be described as “coordinated activities to direct and control an organization”. Risk management is defined as “coordinated activities to direct and control an organization with regard to risk”. The parallels between these two statements demonstrate how closely risk management and governance are linked.
Risk Management is one of the important pillars of Governance and arguably the only tool to deal with business uncertainty. Risk Management is used most successfully by Fortune 500 and other large companies to sustain and grow their businesses. Risk management is recognised as an integral component of good management and governance. It is an iterative process consisting of steps, which, when undertaken in sequence, enable continual improvement in decision making.
Risk management is the term applied to a logical and systematic method of establishing the context, identifying, analysing, evaluating, treating, monitoring and communicating risks associated with any activity, function or process in a way that will enable organisations to minimise losses and maximize opportunities.
Risk management is as much about identifying opportunities as avoiding or mitigating losses.
Risk consequences can be fatal to any business. The expenditure of fixing damage and/or the loss of valued assets or even customers to competition after a catastrophe can have a significant impact on the bottom line of a business. By identifying and managing risks entities are able to actively protect value from any potential catastrophes and save valuable time and money. A risk management plan and system is there to do more than identify risk, a good system should also quantify the risk, predict the impact, and put procedures in place to mitigate the risk, or even eliminate it to the extent possible.
What are the benefits of a risk management plan?
- Saving valuable resources: time, income, assets, people and property can be saved if fewer claims occur
- Creating a safe and secure environment for staff, visitors, and customers
- Reducing legal liability and increasing the stability of your operations
- Protecting people and assets from harm
- Protecting the environment
- Reducing your threat of possible litigation
- Defining your insurance needs to save on unnecessary premiums
The absence of effective risk management participation at the Board level encourages herd mentality and the acceptance of status quo. Effectively defining and managing risks that matter is a key element for survival and sustained growth. It empowers the Boards to build business resilience and the maturity to manage risk priorities. This ultimately results in greater predictability of performance and higher value creation for shareholders. A holistic risk management framework would empower Boards to:
- Identify top threats to entity and asset protection measures.
- Link risks to more efficient capital allocations and business strategy.
- Develop a common language in the organisation for problem solving.
- Effectively respond to an evolving business environment.
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