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SBL - Risk - Week 3 Flipbook PDF
Risk
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Risk
RISK ● Risk: the ‘chance of exposure to the adverse consequences of uncertain
future events’ ●
Risk awareness: the ability of an investor to recognise and measure the risk associated with it
Risk categories Fundamental risks are those that affect society in general, or broad group of people, and are beyond the control of any one individual
Particular risks are risks over which an individual may have some measure of Control Speculative risks are those from which either good or harm may result. e.g.,
a business venture
Pure risks are those whose only possible outcome is harmful
Risks vary by sector ● Different business environment
● Different business models
● Different financial structures, strategies and cost bases
Risk appetite “the amount of risk an organization is willing to accept” ● It comprises two key elements:
● (i) the level of risk which the company’s directors consider desirable; and ● (ii) the capacity of the company to actually bear the level of risk.
Embedding Risk ● Risk awareness embedded throughout the organization at all levels in
order to manage risk effectively. ● Risk management is not a stand-alone activity- it is normal behavior
Embedding risk How can risk be embedded?
1.
a visible policy on risk awareness supported by the management
2. open communication and a supportive culture
Embedding risk ● 3. establish formal systems such as a risk committee and a risk auditing
● 4. embedded into human resource systems
● 5. publicise success stories in the company and to reward risk awareness
behaviour
Risk
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Important terms/Types
Strategic risks ● Arise from the fundamental decisions that directors take concerning an
organisation’s objectives ● If they occur, force a change in strategic direction of the organisation.
Operational risks
● Risks connected with the internal resources, systems, processes, and
employees of the organization
● That would impact the organization’s ability to achieve the current
strategy.
Strategic vs. Operational- simplified!
● 'things that will affect our ability to reach our intended destination'
Vs ● 'threats to keeping the factory running'
Financial risks
● Which arise from the way a business is financially structured, its
management of working capital and its management of short and longterm debt financing.
Business risks -
Which can threaten the survival of the business as a whole and they can arise from many sources.
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Essentially they arise because of the business model which an organisation operates and the strategies it pursues.
Business risks (financial, operational, compliance) ● Financial risks ● Credit risks
● Market risk ● Financial market risk
● Liquidity risk
● Exchange rate risk
● Interest rate risk
● Legal and compliance risk
● Political risk
● Technology risk
● Health and safety risk
● Environmental risk
● Fraud risk
● Intellectual property risk
● Reputational risk
● Business probity risk
● Entrepreneurial risk
● Trading risk
Risk
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The risk management process
Risk Management Process Identify Assess
Manage Report Monitor
Assess Risks Consequences (impact or hazard) Low
Likelihood/ Probability
Low High
High
Risk perception ● Risk perception :he belief about the chance of a risk occurring and/or about
the extent, magnitude, and timing of its effects. ● If likelihood and/or impact can be measured with scientific accuracy then we
can say that the risk can be objectively assessed. ● In many cases, however risk problems can be ‘messy’ and it can be difficult to
accurately assign a value to a likelihood or an impact. This is where subjective judgments can be used
Response to Risks-TARA Transfer ( share)
Avoid
Risk Strategies
Reduce (mitigate)
Accept
Risk diversification
● Adjusting the balance of activities so that the company is less exposed to
the risky activities and has a wider range of activities over which to spread risk and return.
As low as reasonably practical ( ALARP) ● There is an inverse relationship between risks and their acceptability ● ALARP relates to the level of risks which are unavoidable and so should be controlled. ● there must be a reasonable proportion between the quantum of risk and the costs incurred for mitigating the risk.
● if there is a significant disproportion between the two variables the cost incurred cannot be considered as “ALARP”.
Risk Correlation
Related risks: One type of risk can give rise to another
Risk correlation/covariance: Risks vary together (negative or positive correlation)
Risk Reporting ● Include in the annual report:
Measures taken by the board to address risks
Risks resulting in a material error in the financial statements are reported by the auditor in the audit report.
Monitoring Risk-Risk Audit
Risk identification Risk assessment Review of controls over risk Report
Risk committee-Roles ●
Recommendation to the board of a risk management strategy
●
Reviewing reports on key risks
●
Advising the board on risk appetite and acceptable risk tolerances
●
Advising the board on all high-level risk matters
●
Monitoring overall exposure to risk
●
Informing shareholders, and other key stakeholders, of any significant changes to the company’s risk profile.
Roles of risk manager ● Providing overall leadership, vision and direction
● Developing and promoting RM competences, systems, culture, procedures,
protocols and patterns of behavior ● Reporting on the above to management and risk committee as appropriate ● Ensuring compliance with relevant codes, regulations, statutes
Managing the upside of risk Historically the focus of risk management has been on preventing loss. However, recently, organizations are viewing risk management in a different way, so that: ● Risks are seen as opportunities to be seized ● Accepting some uncertainty in order to benefit from higher rewards
associated with higher risk
● Identify risks associated with new opportunities
● Effective risk management is being seen as a way of enhancing shareholder
value by improving performance