The Importance Role of Risk Management

Regulatory compliance refers to the objective that corporations or public organizations seek to in their endeavors to make sure that affiliates are conscious of and make attempts to abide by relevant rules and policies. However, compliance and regulatory expenses can be a major encumber on the global industry. Risk management regulations have become ever more refined and in numerous organizations, the risk management utility is an individual business task encompassing the analysis of not only conventional risks but also regulatory compliance risks. (Gallati 2003)

The components of Risk Management can broadly be classified into three areas, namely Risk Avoidance, Risk Assessment, and Risk Control.

Risk Assessment can be further categorized into the following:

  • Risk Identification- recognizing the risks;
  • Risk Analysis- scrutinizing the impacts and effects of identified risks; and
  • Risk Prioritization- prioritizing the risks based on quantification strategy. (Frenkel 2005)

The risk Control layer is subcategorized as:

  • Risk Management Planning- Crafting a plan to tackle individual risks;
  • Risk Resolution- Implementing the plan; and
  • Risk Monitoring- tracking the progress of the counter-risk strategies. (Crouhy 2000)

Risk learning spaces refer to the notion of identifying the areas, factors, and aspects which provide key insight into the status or potentiality of identified risks. Risk management techniques make use of assessment tools once risks are identified in order to gain information about the causes, effects, and impacts of the particular risks. In the process, key areas are identified and resorted to in order to obtain comprehensive learning about the details of the risk. Examples may include, analysis of previous records, studying affected areas, etc. (Dempster 2002)

Dynamic conservatism is risk management strategy that refer to a specialized management policy employing different approaches across diverse situations. It adds more flexibility to the entire risk management strategy of the organization employing this mechanism. It analyzes each of the risks identified and decides whether to adopt a relatively dynamic position in order to mitigate the risk or rather take a conservative stance in order to counter or offset the impacts of the risk. This approach allows the organization to apply a better-suited policy to counter individual risks. (Holmes 2002)

SWOT analysis is a strategic planning technique used as a risk management or specific risk analysis tool. SWOT Analysis commences with identifying the objective of the project evaluates the following aspects typically engaged in a project or business undertaking:

  • Strengths- internal characteristics of the business which are advantageous in accomplishing the objective;
  • Weaknesses- internal features of the business which are detrimental to the realization of the objectives;
  • Opportunities- external settings that facilitate the process of accomplishing the objective; and
  • Threats- external settings which adversely affect the business’s performance. (Gordon 2008)

Management by Objectives (MBO) is an important process in almost every division of a business. It has a significant role in Risk Management and Compliance too. It is the process of determining and spreading out objectives for an organization’s operation so that personnel are conscious about objectives and recognize their role in the organization. The quintessence of MBO is participatory objective setting and deciding upon a specific course of action. A significant application of the MBO in Risk management comes in risk monitoring where performances of the mitigation strategies are contrasted with the set standards. (Andersen 2007)

The realization of well-planned and effective risk management strategies within organizations fosters solidity across the entire organizational system. Particularly, internal risk management carries out four important functions:

  1. To shield the organization against the market, credit, operational, and legal risks;
  2. To save the industry from the harm of any systemic risk;
  3. To defend the organization’s consumer base from extensive non-market oriented losses (for example, operational failure, frauds, etc.); and
  4. To shield the organization and its franchise from undergoing adverse experiences due to reputation risk. (Forlani 2002).

References

Andersen, T.J. (2007) ‘Strategic responsiveness and Bowman’s risk-return paradox.’ Strategic Management Journal, 28 (4): 407-429.

Crouhy, M. (2000) Risk Management. LA: McGraw-Hill Professional.

Dempster, M.A.H. (2002) Risk management: value at risk and beyond. London: Cambridge University Press.

Forlani, D. (2002) ‘New product decision making: How chance and size of loss influence what marketing managers see and do’. Psychology and Marketing, 19 (11): 957-981.

Frenkel, M. (2005) Risk management: challenge and opportunity. LA: Springer.

Gallati, R.R. (2003) Risk management and capital adequacy. LA: McGraw-Hill Professional.

Gordon, D. (2008) Managing Project Risk: Best Practices for Architects and Related Professionals. New York: John Wiley and Sons.

Holmes, A. (2002) Risk Management. New York: John Wiley & Sons.

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