What defines ‘risk’ and how does your organisation manage them?
Risk is defined as the “effect of uncertainty on objectives”. There are both internal and external risks that may compromise an organisation’s ability to achieve its objectives. As such, it is crucial for organisations to be aware of and manage various risks that they are faced with to adapt to changes and remain competitive.
A business should perform regular reviews of its risk environment to identify any opportunities in processes and external risks that may create uncertainty. This is when a risk and governance review becomes most valuable to improve risk management and governance processes.
1. A preventive approach, not a reactive one
It is common for a business to implement a risk and governance framework once the disruption has already occurred. It is important to identify and mitigate risks rather than adopting a reactive approach. An organisation needs to have an understanding of the risks inherent in their key processes and controls and be aware of external risks that provide uncertainty.
A risk framework can be a challenging task for organisations as it should be practical and effective to ensure that it will mitigate any potential disruptions to achievement of the business’ objectives. The board and management should be involved in this process and oversee the framework to ensure there is awareness across all levels of staff and it is embedded into the culture.
2. A constant changing environment
There are multiple types of risks that businesses are exposed to including strategic, operational, financial and technological.
An organisation should build their operational resilience to react and absorb any disruptions that may arise. Operational resilience will provide a sustainable reward of protection through financial stability, and protection of stakeholders and the brand. In addition, operational resilience will allow the business to pursue opportunities rationally and make informed decisions based on the business’ risk appetite.
3. Legislative and regulatory changes
There are constant changes in legislative and regulatory requirements that can be challenging for organisations to manage. This increases the risk of non-compliance and missed reporting obligations. A sound risk management framework includes a compliance framework which would evolve with changing legislation’s and regulations.
A business should understand the risks they are vulnerable to and the impact of those risks on the business objectives and opportunities for growth and innovation. Business disruptions can affect various areas including the operating model, assets, stakeholders, and the ability to deliver products and services.
Studies have shown that among large companies, strategic risks (including reputational, financial, competitive and governance) account for approximately 60% of major declines in market capitalisation followed by operational risks (30%).