FRM Presentation 2

Risk management
• Risk management is the process of identifying, assessing and

controlling threats to an organization's capital and earnings.
• These threats, or risks, could stem from a wide variety of sources,
including
• Financial uncertainty,
• Legal liabilities
• Strategic management errors
• Accidents and natural disasters
• Risk Management costs money
• Non operational budget
• Investment for
• What return?
• What benefit?
Benefits of risk management
• Potential benefits include:
-compliance with legislation and regulation
-improved corporate governance (top management control)

• Appoint Competent Board Members
• Ensure Timely Information
• Prioritize Risk Management
• Evaluate Board Performance
-understanding (and therefore avoiding or reducing) operational risk
- understanding risks associated with opportunities (better choices)
-improvement in both internal and external risk reports
- communication (increase in stakeholder satisfaction)
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 avoidance of disasters;
• reduction in frequency of incidents;
• reduced insurance costs;
• increased likelihood of meeting organisation objectives;
• preservation of reputation;
• improved health and safety; and
• quicker recoveries from emergencies.
Risk management activities should include the measurement of benefits, if
possible in financial terms, to justify the use of resources and budgets.
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Risk and Organizational Objectives
• All organisations have a range of objectives
• A stakeholder is defined as any individual, group or

organization that can affect, be affected by, or perceive itself
to be affected by, a risk
• Organizations develop strategies and plans to demonstrate

those objectives can be met
• Traditional dependencies are changing as modern business

models have emerged over the last decade or so
• Evolve with the new challenges

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• Organizations are becoming more globally oriented and increasingly look
to outsourcing
• Modern businesses tend to be leaner than their traditional counterparts,
offering less margin for error
• Risks are anything with the potential to threaten the operations, assets
and other responsibilities of an organisation
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• Directors of an organisation will normally consider risks prior to building a strategic plan:
• market factors and trends
• potential competition moves
• possible technological changes
• developing the needs of the customers they serve.
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Organisation as nexus of Contracts
Risks from stakeholders:
• Employees
• The behavior of employees is not always be aligned with organisation
objectives.
• Risks of fraud and general negligence must be considered
• Willful damage being caused by disgruntled staff
• Any thing that might make employees dissatisfied must be viewed as
risk
• Threatens efficient operations and achievement of objectives
• Suppliers
• Trust& confidence
• Legal agreement
• Supply chain – responsible suppliers
• Customers
• Loose confidence in case of abnormality
• No repetitive business
• Legal implications
• Regulator
• Fines & penalties
• Unfavorable opinions
• Requirement compliance
• Media
• Unfavorable opinion results in negative publicity
• Private investors
• Investments of them might be non diversified
• Personal & professional lives at stakes
• Investors with non monetary stakes – reputation at risk
• Banking Industry
• Borrower found to be weak, loan amounts might be called back
• In case of default, collateralized assets are auctioned
• Increases cost of borrowing
• Quoted shareholders
• Shareholders can sell of their positions
• Free fall of prices
• Cost of borrowing increases
• Business partners
• Multiple partners
• Shared brand values & reputation
• Failure of one can be destructive to firm
• Environment
• Fraud
• Money laundering
• Insider dealing
• Waste disposal, energy & conservation etc impact upon environment
Protection against damage or loss
Damages can happen in other ways too..
Couple of things to be considered
• Safety of people
• Safety of assets
• Revenue and cash flows
• Legal obligations
• Delivery of promised goods & services
Safety of people
• Safe environment for employees and visitors from
• accidents & crimes
• Illness, stress, bullying, radiation hazard etc
• Availability of skilled resources
• Teams
• Groups
Safety of assets
• Balance sheet assets
• Buildings, money, equipment etc
• Off balance sheet assets
• Intellectual assets – information
• Training, expertise of workforces, credit ratings, recipes etc
• Reputation, brand
• Network of critical suppliers, relationships and contracts
• Distribution system
• Customer base
• Revenue & cashflows
• Efficient financial and credit controls
• Legal obligations
• Compliance is highest priority
• Regulator license approvals
• Contractual liabilities
• Environmental responsibilities
• Fines and penalties from criminal law
• Litigation expenses
Delivery of promised goods and services
• Defects /low quality of product – costly
• Timely delivery
• Post sales service
• Imagine
• Regular sales service along with recall product service

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Risk management

• Risk management is the process of identifying, assessing and

• Non operational budget

-improved corporate governance (top management control)

-understanding (and therefore avoiding or reducing) operational risk

- understanding risks associated with opportunities (better choices)

-improvement in both internal and external risk reports

- communication (increase in stakeholder satisfaction)

• A stakeholder is defined as any individual, group or

• Organizations develop strategies and plans to demonstrate

• Traditional dependencies are changing as modern business

• Evolve with the new challenges

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