Transcript
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.
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