Definition of risk management

Risk ManagementRisk management is the process of identifying, quantifying, and managing the risks that an organisation faces. As the outcomes of business activities are uncertain, they are said to have some element of risk.  These risks include strategic failures, operational failures, financial failures, market disruptions, environmental disasters, and regulatory violations. Risk is a statistical concept that is measured using statistical concepts that are related to the unknown future. Almost all investments are exposed to it. 

Risk management involves identifying the types of risk exposure within the company, measuring those potential risks, proposing means to hedge, insure or mitigate some of the risks and estimatin the impact of various risks on the future earnings of the company.

While it is impossible that companies remove all risk from the organisation, it is important that they properly understand and manage the risks that they are willing to accept in the context of the overall corporate strategy.  The management of the company is primarily responsible for risk management, but the board of directors, internal auditor, external auditor, and general counsel also play critical roles.

Risk can be managed in a number of ways: by the buying of insurance, by using derivative instruments as hedges, by sharing risks with others, or by avoiding risky positions altogether.

risk management example

As factories can be dangerous places to work, it is important that companies implement appropriate risk management processes.  For example, a company can reduce the likelihood of an accident by limiting work schedules (to reduce employee fatigue), locating equipment in areas that are less vulnerable to damage, performing regular maintenance on equipment, performing regular environmental reviews and establishing communication protocols between line workers, supervisors and management. [1]

Financial Times risk management definition

The process of analysing risk exposure and attempting to minimise it through various means, including diversification; hedging; leverage; etc. [2]

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