Risk Management Overview Paper

Corporate risk refers to the liabilities and dangers that an organization faces. Corporate risk is even more important during more difficult times in the economy. When the economy is not so forgiving, risk management teams will take fewer chances. These more trying times can lead to a decrease in credit availability and less spending overall. When planning an organization’s current and future position, risk management is an important function. A properly planned risk management program will give an organization peace of mind.

The aim of this paper is to define the following corporate risk terms:•Organizational risk•Business risk•Financial risk•Competitive risk•Reputation/Damage Risk•Statistic riskOrganizational RiskOrganizational risks include threats, harmful effects or tribulations which can occur in an organization. These risks can result from one of the two sources:•outside of the company, which are external risks•inside of the company, which are called internal risksExternal risksThe external (outside) risks derive from changes in the atmosphere of the company, whether it is economic, political, sociological or technological changes, which can have a less than favorable influence on the intentions and the policies of the company.

Internal risksThe internal risks can result either from processes, or from the management information. According to Merna and Al-Thani, 2008, a poor infrastructure can result in weak controls and poor communications with a variety of impacts on the business. Good communication links will lead to effective risk management.

Business RiskWhen a company is either unable to fully function or can only function unproductively, that leaves a risk of financial loss in terms of lower business revenues or increased costs. “Broadly defined, business risk management is concerned with possible reductions in business value from any source” (Harrington and Niehaus, 2004). The corporation’s value to its shareholders, which is reflected in the value of the organization’s common stock, really depends on the variability related to the company’s future net cash flows. According to Harrington and Niehaus, 2004, the major business risks that give rise to variation in cash flows and business value are price risk, credit risk, and pure risk. These business risks, although very common, are more difficult to predict or estimate.

Financial RiskAccording to Harrington and Niehaus, 2004, “Most corporations manage financial risks separately from pure risks, often within separate departments, and the terminology and methods used by financial risk managers often differ from those used by pure risk managers.”The essence of financial risk is concerned with the organization’s ability to ‘pay its way’. In practice, this covers a wide area, incorporating all of the existing financial support systems and frameworks available to a particular corporation.

There are few organizations that are good predictors of their on-going workplace costs with certainty, which make them exposed to financial risks. In addition, the company does not know when they are likely to require more or less accommodation, which adds another layer of financial risk. Financial risks are both direct and indirect and can potentially affect both, short-run cash flow events and also have a long-run impact on total enterprise value.

Financial risks came to be divided into three categories:•Market risk – risk due to uncertainty in future market values•Credit risk – assessed potential defaults or credit deteriorations in terms of their mark-to-market impact (poses the least challenges)•Operational risk – assessed in terms of its actual or potential direct costsCompetitive RiskCompetitive risks are associated with changes in or actions by competitors, regulators, customer or suppliers. If any of these changes reduce an organization’s ability to create value and set themselves apart from the competition the company is at risk. These risks cannot be controlled however there should be an abundance of information on the forthcoming threats and opportunities within the competitive environment.

Reputation/Damage RiskDamage to what a brand is perceived to be can mean a potentially irreversible loss of market share. Reputation risk affects the company as a whole, and is not just departmental. A damaging reputation can strike an organization at its foundation therefore the need to safeguard a company’s reputation is implied through the considerable budgets geared towards marketing, recruiting, public affairs, compliance, communications and retention programs.

Threats to a company’s reputation exist during any crisis situation, and damage can be caused by several issues, which include:•accounting scandals•product recalls•consumer safety issues•how the crisis is handled by senior management”Risk to reputation becomes greater as the public becomes less tolerant of organizations that do not conform to societal and environmental principles” (Reputation Management, 2007).

Statistic Risk

Statistic risk can be defined as a choice that offers a constant level of uncertainty regarding the outcome or payoff. It is a situation that is not notably affected by the business environment. The relevance of statistic risk comes into play in gambling situations. For instance players of slot machines with constant payout ratios face static risk.

ConclusionRisk affects every aspect of human life. “Most people think of risk in terms of three components: something bad happening, the chances of it happening, and the consequences if it does happen. These three components of risk can be used asthe basis of a structure for risk assessment” (Merna and Al-Thani, 2008). Although this paper has focused on the different corporate risk terms, there is much more about corporate risk to learn including:•why there is a need for a risk management function•the role of corporate culture•technology issues•independenceIn any organization there are two issues for management to face:•fully understanding the nature and source of the risks•understanding the intensity of each risk and appropriate risk management strategy.

References:

Merna, T., & AL-Thani, F. (2008). Corporate Risk Management (2nd ed.). : John Wiley & Sons Ltd.

Trieschmann, J. S., Hoyt, R. E., & Sommer, D. W. (2005). Risk Management and Insurance (12th ed.). : Cover to Cover Publishing Inc..

Harrington, S. E., & Niehaus, G. R. (2004). Risk Management and Insurance (2nd ed.). New York, NY: McGraw-Hill/Irwin.

R&A Crisis Management Services . (2007). Reputation Management. Retrieved from http://www.raconsulting.net/index.aspx