Playing it Safe With Corporate Risk Management
The practice by which a firm optimizes the manner in which it takes business risks is called risk management. It includes monitoring of risk taking activities, upholding relevant policies and procedures and distributing risk-related reports.
The scope of Corporate Risk Management extends to the risks of non-financial corporations and financial institutions that are not engaged in trading or investment management. Risks vary from one corporation to another depending on factors such as size, industry, diversity of business lines, sources of capital, etc. Practices that are appropriate for one corporation are inappropriate for another. For this reason, corporate risk management may only be broadly defined. Companies pick and choose from several techniques to suit their own needs. To make things easier, risk management templates and tools are available with vendors such as
Let's take a look at the prerequisites for successful corporate risk management (CRM).
Corporate Culture: Your business can manage risk only when your employees are willing to deal with it. Often, you might have a tough time with this. You build systems but cannot force implementation which is necessary to effectively manage risk.
Your company's culture plays an important role in corporate risk management, as it has an influence on the level of risk taking by the organization. A positive risk culture promotes individual responsibility and supports risk taking. No risk culture is perfect, and is therefore open to improvement. Your challenge as a business leader is to honestly assess your organization's culture and then work to change it. Books like "CRM: An Organizational Perspective" and "CRM: Global Best Practices
Policies & Procedures: These are powerful tools of corporate risk management as they direct your employees' actions. They specify how people can accomplish their tasks, but if neglected, can become an impediment.
Just setting policies or procedures isn't enough; you need to ensure your employees follow them. Formalizing the way in which you change existing policies or procedures will help your employees recognize the changes taking place.
Technology: Technology plays an important role in risk assessment and facilitating communication. It is used to quantify or summarize risks as they are being taken and then communicate this information to decision makers. It can include an interactive risk report that is electronically circulated to managers every day.
Independence: Effective corporate risk management demands independence of the risk managing functions from the risk taking ones. Some guidelines for fostering this independence are as follows:
1. Lines of reporting should be reasonably independent.
2. Except at the highest levels, risk takers should not be involved in reviewing performance, deciding compensation or recommending promotion of risk managers.
3. There should be no switching of employee roles between risk taking and managing.
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