Holistic Approach towards Risk Management

Focus: Are we waiting for a new disaster to swallow all of our generated wealth or we are not sufficiently informed about all the facets of the risk management.

As Peter Drucker says:

“A business has to try to minimize risks. But if its behavior is governed by the attempt to escape risk, it will end up by taking the greatest and least rational risk of all: the risk of doing nothing”.

From last several decades corporate trend is to focus on corporate governance whereas, risk governance is perceived and inclined towards the financial risk management of the organizations. Events in the recent past in case of LTCM, Barings, Metallgeselschaft, Satyam, P&G etc. taught us strict lessons of improper risk management practices. Companies have now started realizing that it is only partial and biased view towards the risk management.

There are two angles to look at risk management. First, risk management has other unexplored dimensions like operational, strategic and hazard risks. Second angle points out that, risk is not only a negative outcome of an unwanted or unexpected event, but also, an indication of potential benefit at the cost of risk. How much proportion anyone wants to distribute between risk and opportunity is the need and taste of decision makers and art of the risk manager.

Earlier, much of the focus of risk management has been on financial risk management only by managing fluctuations in financial parameters like interest rates, exchange rates, inflation etc. Risk managers worldwide are now shifting gears to practice risk management in synchronized and holistic way which is termed as Enterprise Risk Management. In many organizations the purchase, treasury, HR, legal and finance departments handles risks independently at the department level, which is not an appropriate way. An organization-wide view of risk management may tremendously raise the efficiency to peak level and generate synergies among the departments.

Task of the risk manager is to classify and interpret relevant risk measures as per the need of the organization since it is not possible to list the full gamut of potential risks. Moreover, one template of risk classification cannot generalize risk management for all organizations.
If we consider BASEL II framework for non-financial firms, it distributes risk into three categories –

1.  Operational risk (business risks, IT, business operations)
2.  Financial risk ( Interest rate, exchange rate, inflation, counterparty, insolvency)
3.  Market based risk.

Other risks which may be considered but not specified in BASEL II are Strategic risks (reputational, political, demographic) and Hazard risks (diseases, fire, theft, crime). So we can say that there is no exhaustive list of all the potential risks for organizations and it is only tailor made structure which is efficient.

Conclusion: Organizations sitting on the assumptions of risk management to be of only financial nature and treating them in piecemeal fashion are prone to risks of crisis in the long run. Holistic approach of risk is the need of latest and future generation of firms. Sooner or later they would be embracing firm-wide perspective of the risk management. Risk management will take new leaps and bounds in the coming future by treating risk management as one of the essential arm of any successful organization.

Thanks & Regards
PureValue Research Team

One Reply to “Holistic Approach towards Risk Management”

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