A Risk Management Framework

Risk management in a business environment is attempting to identify and then manage threats that could severely impact or bring down the organization. Generally, this involves reviewing operations of the organization, identifying potential threats to the organization and the likelihood of their occurrence, and then taking appropriate actions to address the most likely threats. Most Companies Acts require every company to attach to its Board Report a statement indicating development and implementation of a Risk Management Framework for the company including identification therein of the element of risks, if any, which in the opinion of the Board may threaten the existence of an organization.

Purpose

A risk management framework or policy establishes the process for the management of risks faced by an organization. The aim of risk management is to maximize opportunities in all activities and to minimize adversity. This framework applies to all activities and processes associated with a company’s normal operations. Effective risk management allows a company to: 

1. Embed the management of risk as an integral part of its business processes;

2. Establish an effective system of risk identification, analysis, evaluation, and treatment within all areas and all levels;

3. Make informed decisions and have increased confidence in achieving its goals

4. Avoid exposure to significant reputational or financial loss;

5. Assess the benefits and costs of implementation of available options and controls to manage risk

6. Strengthen corporate governance procedures

Thus, it is the responsibility of all board members, senior management, and employees to identify, analyze, evaluate, respond, monitor, and communicate risks associated with any activity, function, or process within their relevant scope of responsibility and authority.

Types of Risks

In today’s uncertain and competitive business environment, strategies for mitigating inherent risks in accomplishing the growth plans of a company are imperative. The common risks are compliance risk, technology risks, business risk, inter-alia, further includes financial risk, political risk, legal risk etc. To manage risk more efficiently the company would need to identify the risks that it faces in trying to achieve its objectives. Once these risks are identified, the company would need to evaluate these risks to see which of them will have a critical impact on the company and which of them are not significant enough to deserve further attention.

A Risk Management Framework

In principle, risk always results as a consequence of activities or as a consequence of non- activities. Risk Management and Risk Monitoring are important in recognizing and controlling risks. Risk mitigation is also an exercise aimed at reducing the loss or injury arising out of various risk exposures. Most organizations adopt a systematic approach to mitigate risks associated with the accomplishment of objectives, operations, revenues, and regulations. They believe that this would ensure mitigating risks proactively and help to achieve stated objectives. Organizations ought to consider activities at all levels of the organization and its risk management with a focus on three key elements:

1.     Risk Assessment- a detailed study of threats and vulnerability and resultant exposure to various risks.

2.     Risk Management and Monitoring- the probability of risk assumption is estimated with available data and information.

3.     Risk Mitigation- Measures adopted to mitigate risk 

Risk Mitigation Measures

1. Tracking micro and macroeconomic level data, market trends, and forecasts by expert agencies and conducting an internal review by a team of experts.
2. Tracking the global and domestic economy, climatic conditions, geopolitical factors, global demand and supply, trade policies etc.
3. Alternative sources of clients and expansion, however, based on experience gained from the past and by following the market dynamics as they evolve, movement by competition, economic policies, and growth patterns of different segments, an organization is able to estimate the demand during a particular period and accordingly, supply is planned and adjusted.
4. The organization takes specific steps to reduce the gap between demand and supply by expanding its customer base and improvement in its product profile.
5. Technological obsolescence is evaluated on a continual basis and the necessary investments are made to bring in the best of the prevailing technology.
6. Proper financial planning is put in place with detailed Annual Business Plans discussed at appropriate levels within the organization.
7. Annual and quarterly budgets are prepared and put up to management for detailed discussion and an analysis of the nature and quality of the assumptions, parameters etc.
8. Daily and monthly cash flows are prepared and monitored at senior levels to access the fund requirements and ensure utilization of funds in an effective manner.
9. The Company is committed to maintain high standards of compliance and to comply with evolving laws, regulations, and standards.
10. Conducting risk assessments and enforcing and monitoring code of conduct for key executives
11. Deploying a strategy and process for implementing the new controls and adhering to internal control practices that prevent collusion.