Risk can be defined as, in general, something which is very large, sometimes in the future, or uncertainty of outcome (whether positive opportunity or negative threat). The bottom line of managing a corporate is to create value for the shareholders. The major task of risk management is to ensure the organization can keep on creating value under any uncertain environment. Risk management has to support better decision making through good understanding of risks and their possibly impact.
Risk management is an cyclical process starting from identification of risk factors, risk assessment and measurement, making a decision on using financial tools to do something about risk (e.g. avoid, accept, or hedge, etc.), and monitoring and controls. Risk management means running business by taking risk at an acceptable level and preventing a severe loss to the corporate even if the adverse events would be occurred in the future.
History of the Infamous Disasters of Not Managing Risks Holistically
The last twenty years have witnessed collapses of major financial institutions. We should have learnt from the mistakes of the failing institutions of not managing risks properly
Wall street crash of
1987
USA
Asian Crisis
1997
SEA
Sumitomo Corporation
1996
Japan
-2,600 $m
Orange County ,
1994
USA
-1,700 $m
Metallgesellschaft
1993
German
-1,500 $m
Barings PLC
1995
U.K.
-1,400 $m
Daiwa Bank
1995
Japan
-1,100 $m
Allied Irish Banks PLC
2002
Ireland
-750 $m
Merrill Lynch
1987
USA
-377 $m
Kidder Peabody
1994
USA
-210 $m
Codelco
1994
Chile
-170 $m
Plains All-Merican Pipeline
1999
USA
-160 $m
For example, the collapse of Barings Bank in 1995 is due to a huge unauthorized exposure to derivatives. Nick Leeson was in charge of trading at the Singapore Branch of Barings Bank, and also in charge of the back-office operation.
The crises in Orange County in 1994 is explained by large positions in interest rate derivatives. The investment pool was invested in highly leveraged investments.
The near collapse of Long Term Capital Management (LTCM), whose partners included two Nobel-price winners (Myron Scholes and Robert Mertons), in 1998 has highlighted the risks of excessive leverage. Excessive reliance on VaR without performing stress testing.
Most disasters have typically been caused by fraud, excessive leverage, or by a derivative being misused or misunderstood.
What are risk factors which could place an organization at risk?
The business management is the process to delivery the business service which has to do and face the following situations.
To maintain business continuity and service provision.
To adapt to changes in the market and/or customer needs.
To avoid the impact of failure
To achieve benefits and exploit opportunities, including enabling innovation through new technologies
To comply with legal and regulatory requirements
To manage risk associated with acquisition, procurement, outsourcing, new products or services
There are many ways to categorize risks. Here are some examples of risk: strategic/commercial risks, economic/financial/market risks, legal and regulatory risks, organizational management/human factors, political/societal factors, environmental factors, technical/operational/infrastructure risks.
Why do we have to manage risk?
Since we need to keep our corporate in the business and have to deal with the uncertainty in the future so that it is a risky business. Environment always keep on changing. New things and complex technologies could introduce new risks. Today we are in the economy-of-speed world. So we cannot get away of risk or cannot completely get rid of risk. For example, internet has been shrank the world into a single large market. Banking becomes a 24-hour market places so business continuity plan is required.
How can risk management create value?
Effective risk management will help us to improve performance in creating value to the firm by contributing to better service delivery, more effective manage of change, more efficient use of resources, better project management, minimizing waste, fraud and poor value for money, supporting innovation. Risk management brings incentives with fair and transparent for staffs, supports both offensive and defensive strategies for executives and effective use of risk-based capital allocation.
Who is involved in risk management?
Board of directors, top executives (CEO, CFO, COO, CIO), business managers, process owners, strategic planners, project and procurement teams and key suppliers are all involved in risk management. Senior management and staffs are all responsible for risk relating to, stakeholders, core business activities and the enterprise’s overall exposure to risk. Senior level has to establish and approve the enterprise-wide risk management framework, which is a critical success factor.
What
