The high level of uncertainty in the global economy and the lack of clarity about the potential impact of these conditions on the business of companies has increased the role of boards of directors in determining risk management policies. Here is more about it.
The concept of risk management policy
Modern economic science presents risk as a possible event, as a result of which positive, neutral or negative consequences may occur. If a risk involves both positive and negative outcomes, it is classified as speculative risk. If the consequences are negative, or absent at all, such a risk is called pure. The purpose of risk management in the economic sphere is to enchase the competitiveness of economic entities by protecting against the realization of pure risks.
Uncertainty is present in any area of the company’s activities, which means that there are risks associated with this uncertainty that must be controlled. The introduction of an integrated approach to risk management allows the company to form an objective view of the current and planned activities of the organization, taking into account possible negative events or new opportunities, to anticipate risks and make decisions based on information about them, to respond to risks on time and reduce the negative impact of risks in case of their occurrence. implementation.
Risk management policy in an ideal organization should be integrated into all processes, should become an integral part of any decision-making process. In practice, risk management is often carried out by a separate division, which leads to its isolation from key business processes. The greatest attention to risk management should be paid when making decisions on the most significant issues for the development of the organization – during strategic planning and changes in company policies, when introducing new projects, processes, and procedures, before large financial investments or optimization measures.
How to organize risk management policy?
Comprehensive risk management should be an integral part of the strategic and operational management of any company striving to become a market leader.
A risk management system can support a range of organizational management objectives. It can act as the basis of all management activities; on its basis, a management strategy and a control system are built. The following is a hierarchy of objectives and steps in developing an organization’s overall risk management system:
- Formulate at the conceptual level the vision, strategies, and objectives of managing the organization and clarify them for interconnection and internal logic;
- Establish principles for identifying, assessing, and diagnosing risk as a basis for setting priority strategies and objectives;
- Use these principles as a basis for creating the most important management control procedures, including when creating an organizational chart, preparing documents on delegation of authority, as well as terms of reference for main and auxiliary units;
- Define procedures for ensuring accountability, self-assessment, and evaluation of performance under the principles of risk management and control system; use these procedures as factors for improving the management process;
- Based on the above principles and procedures, a monitoring and feedback mechanism should be developed to ensure that the procedures are of high quality and to evaluate and verify compliance with them.
Organizational risk management is seen by many as a support function. Now the units that oversee internal risks in the management of the organization and are engaged in their identification and ranking are gaining popularity. There is also an organization’s risk management in the complex (development of a strategy based on a comparison of the level of risk and profit), but it is not so widespread.