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Risk Management

        Business Risks
What is risk?

 Risk is the possibility that an event will
 occur and adversely affect the
 achievement of an objective.

                    COSO ERM Framework
Upside and Downside risk

• Upside
  – Opportunity


• Downside
  – Threat
Underlying principles

  – Every entity, whether for-profit
    or not, exists to realize value for
    its stakeholders.

  – Value is created, preserved, or eroded
    by management decisions in all
    activities, from setting strategy to
    operating the enterprise day-to-day.
Benefits of risk management
    Reduction in management time spent fire-fighting
            Fewer sudden shocks and surprises
More focus internally on doing the right things the right way

                      And therefore

      Greater likelihood achieving business objectives
  Increased likelihood of change initiative being achieved
Strategy is appraised more effectively, leading to calculated
                           risk taking

                           Hence

       Greater confidence in moving into new areas
              Overall cost of risk is reduced
Why Risk Management is Important
  Risk Management supports value creation by
  enabling management to:

     – Deal effectively with potential future events
       that create uncertainty

     – Respond in a manner that reduces the
       likelihood of downside outcomes and
       increases the upside
Strategic and Operational Risks

• Strategic
  – Relate to the fundamental aspects of the
    organisation
  – Linked to the high level corporate objectives
    and the strategic plan


• Operational
  – Relate to the day-to-day matters that could go
    wrong
Risk management process

       Identification   Assessment




         Review         Management
Strategic and Operational Risks

• Strategic
  – Long-term
  – High level


• Operational
  – Short-term
  – Low level
Factors contributing to
strategic risk
•   Industry/market
•   State of the economy
•   Actions of competitors
•   Stage of product life cycle
•   Nature of product e.g. raw material
•   Gearing
•   New technology
Operational risk
  Definition – loss from failure pf internal
  business and control process

Includes
• Internal control failure
• Audit failure
• IT failure
• Loss of key personnel
• Fraud
Impact on Stakeholders
• Business risk can impact on stakeholders in a
  number of ways

• Shareholders
  – Fall in share price
  – Reduced dividend


• Directors
  – Loss of income (bonus)
  – Loss of reputation
  – Termination of office
Impact on Stakeholders

• Managers
  – Loss of income (performance related pay)
  – Promotion opportunities reduced
  – Loss of motivation


• Employees
  – De-motivation
  – Loss of income (performance related pay)
  – Reduced promotion opportunities
Impact on Stakeholders

• Customers
  – Poor product – could look for alternative suppliers
  – Loss of sales to retail market


• Suppliers
  – Loss of supply
Impact on Stakeholders

• Government
  – Loss of taxation revenue
  – Unemployment


• Banks
  – Financial loss from loan defaults
Common business risks
• Financial

• Legal

• Technological

• Health & safety and environmental

• Reputation

• Business Probity
Financial risks

• Currency risk
  – Exchange rate movements
     • Transactions
     • Translation
     • Economic (competitiveness)


• Interest rate risk
Financial risks
• Market risk
  – Movement in market value of an asset
  – Includes derivative risks


• Credit risk
  – Default/late payment of debt


• Liquidity risk
  – Company will be unable to pay its obligations
    (cashflow)
Legal

• Non-compliance with law and regulations
  – Fines/penalties
  – Loss of reputation
Technological risks

•   Physical loss/damage
•   Data and systems integrity
•   Fraud
•   Loss of competitive advantage due to
    failure to introduce new technology
Health & safety and environmental
risks
• Failure to comply with legislation
  – Environmental
  – Health & Safety
Reputation

• Loss of reputation caused by adverse
  consequences of another risk

• Examples
  – Poor customer service
  – Poor ethics
  – Health & safety
Business probity

• Governance and probity within the
  organisation.

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1 business risks

  • 1. Risk Management Business Risks
  • 2. What is risk? Risk is the possibility that an event will occur and adversely affect the achievement of an objective. COSO ERM Framework
  • 3. Upside and Downside risk • Upside – Opportunity • Downside – Threat
  • 4. Underlying principles – Every entity, whether for-profit or not, exists to realize value for its stakeholders. – Value is created, preserved, or eroded by management decisions in all activities, from setting strategy to operating the enterprise day-to-day.
  • 5. Benefits of risk management Reduction in management time spent fire-fighting Fewer sudden shocks and surprises More focus internally on doing the right things the right way And therefore Greater likelihood achieving business objectives Increased likelihood of change initiative being achieved Strategy is appraised more effectively, leading to calculated risk taking Hence Greater confidence in moving into new areas Overall cost of risk is reduced
  • 6. Why Risk Management is Important Risk Management supports value creation by enabling management to: – Deal effectively with potential future events that create uncertainty – Respond in a manner that reduces the likelihood of downside outcomes and increases the upside
  • 7. Strategic and Operational Risks • Strategic – Relate to the fundamental aspects of the organisation – Linked to the high level corporate objectives and the strategic plan • Operational – Relate to the day-to-day matters that could go wrong
  • 8. Risk management process Identification Assessment Review Management
  • 9. Strategic and Operational Risks • Strategic – Long-term – High level • Operational – Short-term – Low level
  • 10. Factors contributing to strategic risk • Industry/market • State of the economy • Actions of competitors • Stage of product life cycle • Nature of product e.g. raw material • Gearing • New technology
  • 11. Operational risk Definition – loss from failure pf internal business and control process Includes • Internal control failure • Audit failure • IT failure • Loss of key personnel • Fraud
  • 12. Impact on Stakeholders • Business risk can impact on stakeholders in a number of ways • Shareholders – Fall in share price – Reduced dividend • Directors – Loss of income (bonus) – Loss of reputation – Termination of office
  • 13. Impact on Stakeholders • Managers – Loss of income (performance related pay) – Promotion opportunities reduced – Loss of motivation • Employees – De-motivation – Loss of income (performance related pay) – Reduced promotion opportunities
  • 14. Impact on Stakeholders • Customers – Poor product – could look for alternative suppliers – Loss of sales to retail market • Suppliers – Loss of supply
  • 15. Impact on Stakeholders • Government – Loss of taxation revenue – Unemployment • Banks – Financial loss from loan defaults
  • 16. Common business risks • Financial • Legal • Technological • Health & safety and environmental • Reputation • Business Probity
  • 17. Financial risks • Currency risk – Exchange rate movements • Transactions • Translation • Economic (competitiveness) • Interest rate risk
  • 18. Financial risks • Market risk – Movement in market value of an asset – Includes derivative risks • Credit risk – Default/late payment of debt • Liquidity risk – Company will be unable to pay its obligations (cashflow)
  • 19. Legal • Non-compliance with law and regulations – Fines/penalties – Loss of reputation
  • 20. Technological risks • Physical loss/damage • Data and systems integrity • Fraud • Loss of competitive advantage due to failure to introduce new technology
  • 21. Health & safety and environmental risks • Failure to comply with legislation – Environmental – Health & Safety
  • 22. Reputation • Loss of reputation caused by adverse consequences of another risk • Examples – Poor customer service – Poor ethics – Health & safety
  • 23. Business probity • Governance and probity within the organisation.

Editor's Notes

  1. Value is created by informed and inspired management decisions in all spheres of an entity’s activities, from strategy setting to operations. Entities failing to recognize the risks they face, from external or internal sources, and to manage them effectively can destroy value – in absolute or relative terms – for shareholders and other stakeholders, including the community and society at large. For companies, shareholders realize value when they recognize value creation and benefit from share-value growth. For governmental entities, value is realized when constituents recognize receipt of valued services at acceptable cost. Enterprise risk management: Facilitates management’s ability deal effectively with potential future events that create uncertainty . Provides the mechanisms to respond in a manner that reduces the likelihood of downside outcomes and increases the upside Enhances the ability to communicate value creation and preservation programs and goals, communicate with stakeholders, and deliver as planned, with few surprises.
  2. Value is created by informed and inspired management decisions in all spheres of an entity’s activities, from strategy setting to operations. Entities failing to recognize the risks they face, from external or internal sources, and to manage them effectively can destroy value – in absolute or relative terms – for shareholders and other stakeholders, including the community and society at large. For companies, shareholders realize value when they recognize value creation and benefit from share-value growth. For governmental entities, value is realized when constituents recognize receipt of valued services at acceptable cost. Enterprise risk management: Facilitates management’s ability deal effectively with potential future events that create uncertainty . Provides the mechanisms to respond in a manner that reduces the likelihood of downside outcomes and increases the upside Enhances the ability to communicate value creation and preservation programs and goals, communicate with stakeholders, and deliver as planned, with few surprises.