Risk Management

Business Risks

What is risk?

Risk is the possibility that an event will occur and adversely affect the achievement of an objective.

COSO ERM Framework

Upside and Downside risk

• Upside– Opportunity

• Downside– Threat

Underlying principles

– Every entity, whether for-profit or not, exists to realize value for its stakeholders.

– Value is created, preserved, or eroded by management decisions in all activities, from setting strategy to operating the enterprise day-to-day.

Benefits of risk managementReduction in management time spent fire-fighting

Fewer sudden shocks and surprisesMore focus internally on doing the right things the right way

And therefore

Greater likelihood achieving business objectivesIncreased likelihood of change initiative being achieved

Strategy is appraised more effectively, leading to calculated risk taking

Hence

Greater confidence in moving into new areasOverall cost of risk is reduced

Why Risk Management is Important

Risk Management supports value creation by enabling management to:

– Deal effectively with potential future events that create uncertainty

– Respond in a manner that reduces the likelihood of downside outcomes and increases the upside

Strategic and Operational Risks

• Strategic– Relate to the fundamental aspects of the

organisation– Linked to the high level corporate objectives

and the strategic plan

• Operational– Relate to the day-to-day matters that could go

wrong

Risk management process

Assessment Identification

Review Management

Strategic and Operational Risks

• Strategic– Long-term– High level

• Operational– Short-term– Low level

Factors contributing tostrategic risk

• Industry/market• State of the economy• Actions of competitors• Stage of product life cycle• Nature of product e.g. raw material• Gearing• New technology

Operational riskDefinition – loss from failure pf internal business and control process

Includes• Internal control failure• Audit failure• IT failure• Loss of key personnel• Fraud

Impact on Stakeholders

• Business risk can impact on stakeholders in a number of ways

• Shareholders– Fall in share price– Reduced dividend

• Directors– Loss of income (bonus)– Loss of reputation– Termination of office

Impact on Stakeholders

• Managers– Loss of income (performance related pay)– Promotion opportunities reduced– Loss of motivation

• Employees– De-motivation– Loss of income (performance related pay)– Reduced promotion opportunities

Impact on Stakeholders

• Customers– Poor product – could look for alternative suppliers– Loss of sales to retail market

• Suppliers– Loss of supply

Impact on Stakeholders

• Government– Loss of taxation revenue– Unemployment

• Banks– Financial loss from loan defaults

Common business risks• Financial

• Legal

• Technological

• Health & safety and environmental

• Reputation

• Business Probity

Financial risks

• Currency risk– Exchange rate movements

• Transactions• Translation• Economic (competitiveness)

• Interest rate risk

Financial risks

• Market risk– Movement in market value of an asset– Includes derivative risks

• Credit risk– Default/late payment of debt

• Liquidity risk – Company will be unable to pay its obligations

(cashflow)

Legal

• Non-compliance with law and regulations– Fines/penalties– Loss of reputation

Technological risks

• Physical loss/damage• Data and systems integrity• Fraud• Loss of competitive advantage due to

failure to introduce new technology

Health & safety and environmental risks

• Failure to comply with legislation– Environmental – Health & Safety

Reputation

• Loss of reputation caused by adverse consequences of another risk

• Examples– Poor customer service– Poor ethics– Health & safety

Business probity

• Governance and probity within the organisation.