Approaches and Processes of Corporate Risk Management

The coordination of the risk management process should be centralized: the risk office analyses and draws up information related to each process phase, and proceeds with strategic planning, in coordination with the organization’s board.

The risk committee, with the risk manager playing the role of coordinator, sets up the criteria to select the most relevant information coming from the risk management information system (selective approach). Significant risks in terms of impact or strategic level are reported by the office supporting the risk manager on a regular, specific and exceptional basis. The risk manager gives directions on translating strategies into risk management objectives, and monitors their achievement by divisions/offices and managers within their own competence. The risk manager therefore finalizes the information received, by adapting it to the organizational context (down to the any single office level), in order to correct possible deviations from strategic priorities.

Risk register development involves detailing organizational risks (corporate as well as project and operational ones), and setting up specific risk registers on particular topics (work health and safety, fraud, IT security, environment, etc.).

Three kinds of approach can be followed for involving management and stakeholders in identifying risks:

• Top down-approach: The decision-making process is centralized at governance level. This approach can show two modes: a) Full top-down mode, where the business units’ risks are listed at department level, meaning that heads of unit cannot add risks themselves at unit level. There is no need of risk escalation, except at departmental level. b) Prevailing top-down mode, where a corporate risk register is directly created from a detailed operational risk register.
• Bottom-up approach: The decision-making process is done at management level. Operational risks are identified by any staff member while performing his or her daily work (e.g., in order to encourage the staff to be more active in defining non-conformities, an opportunity to register them online has been provided).
• Mixed approach: The board entity states the criteria (top-down) by which the heads of unit identify and manage risks (bottom-up). Risks may be viewed and assessed throughout the organization at any level (e.g., group, program, office, project, etc.). In order to set the framework, the hierarchy of risks on which attention is focused corresponds to the enterprise, operational and project levels.

Such approaches are not mutually exclusive, and a combination of approaches to the management of processes is desirable to achieve effective integration of risk management at any level within the organization.

These risk management approaches are also a way of cutting across the organization hierarchy and overcome organizational barriers.

The figure below outlines the risk management process according to the top-down perspective; it also highlights the information flows related to decision-making processes, according to the different roles involved.

Processes of Corporate Risk Management

The risk management process is a framework for the actions that need to be taken. There are five basic steps that are taken to manage risk; these steps are referred to as the risk management process. It begins with identifying risks, goes on to analyze risks, then the risk is prioritized, a solution is implemented, and finally, the risk is monitored. In manual systems, each step involves a lot of documentation and administration.

Step 1: Identify the Risk

The first step is to identify the risks that the business is exposed to in its operating environment. There are many different types of risks – legal risks, environmental risks, market risks, regulatory risks, and much more. It is important to identify as many of these risk factors as possible. In a manual environment, these risks are noted down manually. If the organization has a risk management solution employed all this information is inserted directly into the system. The advantage of this approach is that these risks are now visible to every stakeholder in the organization with access to the system. Instead of this vital information being locked away in a report which has to be requested via email, anyone who wants to see which risks have been identified can access the information in the risk management system.

Step 2: Analyze the risk

Once a risk has been identified it needs to be analyzed. The scope of the risk must be determined. It is also important to understand the link between the risk and different factors within the organization. To determine the severity and seriousness of the risk it is necessary to see how many business functions the risk affects. There are risks that can bring the whole business to a standstill if actualized, while there are risks that will only be minor inconveniences in analyzed. In a manual risk management environment, this analysis must be done manually. When a risk management solution is implemented one of the most important basic steps is to map risks to different documents, policies, procedures, and business processes.

Step 3: Evaluate or Rank the Risk

Risks need to be ranked and prioritized. Most risk management solutions have different categories of risks, depending on the severity of the risk. A risk that may cause some inconvenience is rated lowly, risks that can result in catastrophic loss are rated the highest. It is important to rank risks because it allows the organization to gain a holistic view of the risk exposure of the whole organization. The business may be vulnerable to several low-level risks, but it may not require upper management intervention. On the other hand, just one of the highest-rated risks is enough to require immediate intervention.

Step 4: Treat the Risk

Every risk needs to be eliminated or contained as much as possible. This is done by connecting with the experts of the field to which the risk belongs to. In a manual environment, this entails contacting each and every stakeholder and then setting up meetings so everyone can talk and discuss the issues. The problem is that the discussion is broken into many different email threads, across different documents and spreadsheets, and many different phone calls. In a risk management solution, all the relevant stakeholders can be sent notifications from within the system. The discussion regarding the risk and its possible solution can take place from within the system. Upper management can also keep a close eye on the solutions being suggested and the progress being made from within the system. Instead of everyone contacting each other to get updates, everyone can get updates directly from within the risk management solution.

Step 5: Monitor and Review the risk

Not all risks can be eliminated – some risks are always present. Market risks and environmental risks are just two examples of risks that always need to be monitored. Under manual systems monitoring happens through diligent employees. These professionals must make sure that they keep a close watch on all risk factors. Under a digital environment, the risk management system monitors the entire risk framework of the organization. If any factor or risk changes, it is immediately visible to everyone. Computers are also much better at continuously monitoring risks than people. Monitoring risks also allows your business to ensure continuity.

The basics of the risk management process stay the same

Even under a digital environment, the basics of the risk management process stay the same. What changes is how efficiently these steps can be taken, and as it should be clear by now, there is simply no competition between a manual risk management system and a digital one.

Risk management

Risk management is an important business practice that helps businesses identify, evaluate, track, and mitigate the risks present in the business environment. Risk management is practiced by the business of all sizes; small businesses do it informally, while enterprises codify it.

Businesses want to ensure stability as they grow. Managing the risks that are affecting the business is a critical part of this stability. Not knowing about the risks that can affect the business can result in losses for the organization. Being unaware of a competitive risk can result in loss of market share, being unaware of a financial risk can result in financial losses, being aware of a safety risk can result in an accident, and so on.

Businesses have dedicated risk management resources; small businesses may have just one risk manager or a small team while enterprises have a risk management department. People who work in the risk management domain monitor the organization and its environment. They look at the business processes being followed within the organization and they look at the external factors which can affect the organization one way or the other.

A business that can predict a risk will always be at an advantage. A business which can predict a financial risk will limit its investments and focus on strengthening its finances. A business which can assess the impact of a safety risk can devise a safe way to work which can be a major competitive advantage.

If we think of the business world as a racecourse then the risks are the potholes which every business on the course must avoid if they want to win the race. Risk management is the process of identifying all the potholes, assessing their depth to understand how damaging they can be, and then preparing a strategy to avoid damages. A small pothole may simply require the business to slow down while a major pothole will require the business to avoid it completely.

Knowing the severity of a risk and the probability of a risk helps businesses allocate their resources effectively. If businesses understand the risks that affect them then they will know which risks need the most attention and resources and which ones the business can disregard. Risk management allows businesses to act proactively in mitigating vulnerabilities before any major damage is incurred. There are different types of risk management strategies and solutions for different types of risks.