Risk management is one of the priorities of the company during the implementation of processes and activities. Risk-based planning is constantly encouraged by the top management of the organization. The risk management team identifies techniques to assess potential issues for the business. Its primary responsibilities are adopting an effective risk management program and defining the relevant principles and methods. The team also ensures the continuous development of risk management as corporate culture regarding the organization’s projects, departments, and employees and provides the effective implementation of risk monitoring.
Areas of Risk
First of all, internal risks occur within the organization, which are controllable and should be eliminated. Examples are problems associated with unauthorized, illegal, unethical, incorrect, or inappropriate actions by employees and managers. Considering that it is a big organization, there is an agency risk; it can be defined as an increased CEO wage (ElKelish, 2018). Regarding the firm size, managers might steal a company’s money; agency costs rise when the owner does not run the company (ElKelish, 2018). Operational risk corresponds to potential losses caused by human or material resource failures such as software breakdowns, fraud, and input errors.
Furthermore, one of the areas of risk is the strategy, as the company acknowledges some strategic issues to increase revenue. The company takes risks through its research and development. Strategic matters are entirely different from operational ones because they can be predicted (Larcker & Tayan, 2016). A strategy with high expected returns typically requires the organization to consider significant risks, and their management is key to realizing the potential benefit. This leads to the fact that a strategy mistake can cause a company’s failure. For instance, entering the market with a quality product does not correspond to consumer expectations. The marketing campaign might focus on the Internet audience, but the target customer watches TV. Therefore, the risk management team must identify the weaknesses of the market, industry, suppliers, and production and create an additional plan if the strategy does not work.
Key performance indicators (KPIs) will allow the team to link the company’s risk management strategy with a balanced scorecard (BSC). It also defines the goals and objectives of risk management at the operational level (Larcker & Tayan, 2016). Using KPIs to manage risk has several benefits, including warning of future losses, and support for making management decisions and related actions. It contributes to the ability to test these indicators both for internal purposes of the organization and for external assessment of management quality (Larcker & Tayan, 2016). It is assumed that each risk from the moment of its occurrence and throughout the entire implementation refers to one business process. The KPI value is set for one working cycle; indicators take into account explicit and implicit costs.
Shareholders evaluate the company’s performance according to the results reflected in its financial statements. Distortion of the reporting is unacceptable since the calculation of economic performances and forecasts becomes meaningless if the information presented does not correspond to reality. It is suggested to use integrated reporting since this format implies combining financial and non-financial data (Vitolla et al., 2019). Special attention is paid to the strategic plans of the company and the disclosure of risks affecting the company’s efficiency.
To sum up, the risk management team addresses the organization’s inner risks, including operational and agency costs. The potential issues can be measured by the KPI system and presented to the board in the form of integrated reporting. Thus, the board of directors should discuss the status of the risk management process with senior management. The board should ensure that it is informed of the most significant risks and management actions to control them and ensure that the risk management process is effective. Moreover, the board can consider the need to obtain comments from internal or independent auditors.
Vitolla, F., Raimo, N., & Rubino, M. (2019). Appreciations, criticisms, determinants, and effects of integrated reporting: A systematic literature review. Corporate Social Responsibility and Environmental Management, 26(2), 518-528. Web.
Larcker, D., & Tayan, B. (2016). Corporate governance matters: A closer look at organizational choices and their consequences. Pearson Education.
ElKelish, W. W. (2018). Corporate governance risk and the agency problem. Corporate Governance: The International Journal of Business in Society, 18(2), 254-269. Web.