Risks are Opportunities

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Risks are Opportunities

Risks are Opportunities Earlier, so it seems, the world was less dangerous. Today, more and more enterprises with innovative, complicated technologies and sensitive know-how work at an international level. The greater, the stage becomes on which they move and the more complicated the role they play, the more numerous become the traps which potentially endanger the achievement of the enterprise’s aims. Hence, raised attention and suitable instruments to play this game are – especially in a difficult economic sphere – more than ever compulsory.

Risks are Opportunities 4Today new technologies are under the magnifying glass to a much greater extent that previously. There might be two reasons for this. Firstly, nowadays, most economic disasters are published worldwide within seconds and become known in an instant. Secondly, many new technologies are considered to be risky: James Watt in his time produced steam boilers with one rather low overpressure risk. A malfunction with one of his machines would have had an effect of only some meters and would have been limited to a short time span. However, “modern” catastrophes like Chernobyl had an effect of some thousand kilometers and the resultant radioactivity may still be problematic for many generations to come.

The combination of fast communication and a wider spread of the effects of errors are responsible for the call for risk management at an enterprise level. Company scandals like those at Enron, Swissair and AIM have devastated the stock market and diminished the overall value of stocks by several billion dollars. Trust in the controlling ability of the auditors with regard to stock market supervision has been lost. Pension funds, the big financiers of the 21st century, require transparency in the form of a professional evaluation of the business risks and an open communication of the most important dangers which a business might face.

Complex markets, an advancing regulation density and rising requirements for the transparency and effectiveness of companies are only few of various business risks. Questions by the shareholders or the board of directors regarding the actual risk situation of the company often result in the need for comprehensive auditing of the actual risk situation.

Risk Management vs. Enterprise Risk Management

As a consequence of economic crisis many executives now recognize that single risks can be valued realistically only in their interaction with other risks. Risks should no longer be regarded isolated, but be identified, analyzed and controlled within the framework of all interacting risks. As recent studies confirmed, almost every company looks at these risks in isolation. During the past years, separate subsystems have developed in many companies, for example, on account of legal requirements for the management of risk. These companies look at single risk ranges, for example Treasury or Compliance. The dependence between the risks often remains unnoticed.

The management of risk up to now places the main focus on avoiding the repetition of errors made in the past. The fact that basic conditions can quickly change, like competitive environments or raw materials prices, are often out of sight. Structures for the risk management in a company as well as models and methods for risk management which are based on established, statistical and technical experiences do not always consider the constant changes in the market environment and in the company structure. What is often missing is a logical alignment of risk management with strategic business goals

Enterprise Risk Management 2

The challenge for a company is to bring together its established subsystems with the goal to develop an integrated, company-wide risk management system with dynamic structures. To make the risk management function, it must orientate itself not only to the goals of the company, but also to its strategy and culture. The goal a company wants to achieve with its risk management strategy must be compatible with the overall business objectives. Parallel, lessons learnt from risk management can also lead to an adaptation of the business’ objectives and corporate strategy

Enterprise Risk Management

The industry in which a company acts and the business model are other factors of influence for a company-wide risk management model. For a company in the chemical industry, for example, environment protection orders have a high value. In the insurance industry the minimum requirements influence risk management (MaRisk VA) as the risk management must be followed and are monitored.

Finally, companies must look at the complete risk sphere in which they move. Beside the classical risks which can be strategic, financial and operational nature or concern the legal environment, so-called emerging risks must be also considered. Emerging risks are global risks which can be predicted only hard, for example climate change, political instability or volatile energy prices.

Chi Tran

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