Focus: Are we waiting for a new
disaster to swallow all of our generated wealth or we are not sufficiently
informed about all the facets of the risk management.
As Peter
Drucker says:
“A business has to try to minimize risks. But
if its behavior is governed by the attempt to escape risk, it will end up by
taking the greatest and least rational risk of all: the risk of doing nothing”.
From last
several decades corporate trend is to focus on corporate governance whereas,
risk governance is perceived and inclined towards the financial risk management
of the organizations. Events in the recent past in case of LTCM, Barings,
Metallgeselschaft, Satyam, P&G etc. taught us strict lessons of improper
risk management practices. Companies have now started realizing that it is only
partial and biased view towards the risk management.
There are
two angles to look at risk management. First, risk management has other
unexplored dimensions like operational, strategic and hazard risks. Second
angle points out that, risk is not only a negative outcome of an unwanted or
unexpected event, but also, an indication of potential benefit at the cost of
risk. How much proportion anyone wants to distribute between risk and
opportunity is the need and taste of decision makers and art of the risk
manager.
Earlier,
much of the focus of risk management has been on financial risk management only
by managing fluctuations in financial parameters like interest rates, exchange
rates, inflation etc. Risk managers worldwide are now shifting gears to
practice risk management in synchronized and holistic way which is termed as
Enterprise Risk Management. In many organizations the purchase, treasury, HR,
legal and finance departments handles risks independently at the department
level, which is not an appropriate way. An organization-wide view of risk management
may tremendously raise the efficiency to peak level and generate synergies
among the departments.
Task of the
risk manager is to classify and interpret relevant risk measures as per the
need of the organization since it is not possible to list the full gamut of
potential risks. Moreover, one template of risk classification cannot
generalize risk management for all organizations.
If we
consider BASEL II framework for non-financial firms, it distributes risk into
three categories
- Operational risk (business risks, IT, business operations)
- Financial risk ( Interest rate, exchange rate, inflation, counterparty, insolvency)
- Market based risk.
Other risks
which may be considered but not specified in BASEL II are Strategic risks
(reputational, political, demographic) and Hazard risks (diseases, fire, theft,
crime). So we can say that there is no exhaustive list of all the potential
risks for organizations and it is only tailor made structure which is
efficient.
Conclusion:
Organizations sitting on the assumptions of risk management to be of only
financial nature and treating them in piecemeal fashion are prone to risks of
crisis in the long run. Holistic approach of risk is the need of latest and
future generation of firms. Sooner or later they would be embracing firm-wide
perspective of the risk management. Risk management will take new leaps and
bounds in the coming future by treating risk management as one of the essential
arm of any successful organization.
Thanks &
Regards
PureValue
Research Team
www.pvalueresearch.com
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