What is risk management means?

Risk management is too often seen as a compliance problem that can be solved
by creating a slew of guidelines and ensuring that everybody follows them. Many of
these rules are, of course, reasonable and do help to mitigate certain risks that could be
disastrous for a company. But rules-based risk management will not diminish either the
likelihood or the impact of a disaster such as Deepwater Horizon, just as it did not
prevent the failure of many financial institutions during the 2007–2008 credit crisis.
Effective risk management means attempting to control, as much as possible, future
outcomes by acting proactively rather than reactively. Therefore, effective risk
management offers the potential to reduce both the possibility of a risk occurring and its
potential impact.

According to Robert S. Kaplan and Anette Mikes present a categorization of risk

that allows executives to understand the qualitative distinctions between the Types of
Risk that organizations face.

• Preventable risks, arising from within the organization, are controllable and ought to
be eliminated or avoided. Examples are the risks from employees’ and managers’
unauthorized, unethical, or inappropriate actions and the risks from breakdowns in
routine operational processes.

• Strategy risks are those a company voluntarily assumes in order to generate superior
returns from its strategy.

• External risks arise from events outside the company and are beyond its influence or
control. Sources of these risks include natural and political disasters and major
macroeconomic shifts.Risk events from any category can be fatal to a company’s
strategy and even to its survival.

Companies should tailor their risk management processes to these different risk
categories. A rules-based approach is effective for managing preventable risks,
whereas strategy risks require a fundamentally different approach based on open and
explicit risk discussions. To anticipate and mitigate the impact of major external risks,
companies can call on tools such as war-gaming and scenario analysis.

A good risk management structure should also calculate the uncertainties and
predict their influence on a business. Consequently, the result is a choice between
accepting risks or rejecting them. Acceptance or rejection of risks is dependent on the
tolerance levels that a business has already defined for itself. If a business sets up risk
management as a disciplined and continuous process for the purpose of identifying and
resolving risks, then the risk management structures can be used to support other risk
mitigation systems. They include planning, organization, cost control, and budgeting. In
such a case, the business will not usually experience many surprises, because the
focus is on proactive risk management.

Response to risks usually takes one of the following forms:

• Avoidance: A business strives to eliminate a particular risk by getting rid of its cause.

• Mitigation: Decreasing the projected financial value associated with a risk by lowering
the possibility of the occurrence of the risk.

• Acceptance: In some cases, a business may be forced to accept a risk. This option is
possible if a business entity develops contingencies to mitigate the impact of the risk,
should it occur.

A company must use a problem-solving approach when building contingencies.

As a consequence, you’ll have a well-thought-out strategy that you can put into action
as soon as the need arises. Since it can deal with risks as soon as they emerge, such a
strategy would allow a business organization to deal with obstacles or blockages to its
progress.

Risk Management’s Importance

Risk assessment is a vital method because it provides a company with the

resources it needs to properly identify and handle potential risks. It is simple to minimize
a risk once it has been detected.

Furthermore, risk management provides a firm with a foundation on which to

make rational decisions.

Risk evaluation and management are the best ways for a company to plan for
events that may obstruct progress and development. When a company reviews its
strategy for dealing with future threats and then establishes mechanisms to deal with
them, it increases its chances of being successful.