Topic 7: Introduction to Risk Management and Practical Guidelines in

Reducing and Managing Business Risks

CHAPTER 11

1.       How can effective corporate governance be attained?

It can be attained when an organization masters the art of risk management.

2.       What are the factors that increased the levels of risk faced by business
firms?

These include the fast-growing sophistication of organization, globalization,

modern technology and impact of corporate scandals.

3.       Define risk management (RM).

It is the process of measuring or assessing risk and developing strategies to

manage it.

4.       How is RM defined in the ISO 31000?

It is the identification, assessment, and prioritization of risks followed by

coordinated and economical application of resources to minimize, monitor and
control the probability and/or impact of unfortunate events and to maximize the
realization of opportunities.

5.       What is the role of RM in business?

Through risk management, risks in business are assessed and systematically

managed to reduce risk to an acceptable level.

6.       What are the basic principles of RM as identified by ISO?

 Create value

 Address uncertainty and assumptions

 Be an integral part of organizational process and decision-making

 Be dynamic, iterative, transparent, tailorable, and responsive to change

 Create capability of continual improvement considering best

information and human factors

 Be systematic, structured and continually reassessed

7.       What are the steps involved in the process of RM according to ISO?

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 1. Establishing the Context

a. Identification of risk

b. Planning

c. Mapping

i. Social scope of risk management

ii. Identity and objectives of stakeholders

iii. Basis upon risks will be evaluated

d. Defining a framework

e. Developing analysis of risks

f. Mitigation or Solution

2. Identification of potential risks

3. Risk assessment

8.       How do you identify potential risk?

It can start with the analysis of the source of the problem or the analysis of the
problem itself.

9.       What are the common risk identification methods?

a. Objective-based risk

b. Scenario-based risk

c. Taxanomy-based risk

d. Common-risk checking

e. Risk charting

10.   What is the ideal RM?

It should minimize spending of manpower or other resources while minimizing

the negative effect of risks.

11.   Enumerate the elements in the performance of assessment method.

1. Identification, characterization, and assessment of threats

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 2. Assessment of vulnerability of critical assets to specific threats

3. Determination of the risk

4. Identification of ways to reduce those risks

5. Prioritization of risk reduction measures based on a strategy

12.   What are the factors usually considered with respect to risks associated
with the following? Identify and summarize each

 Risks associated with investments

 Risks associated with manufacturing, trading and service concerns

 Risks associated with financial institutions

13.   Investment

 Business risk refers to the uncertainty about the rate of return caused by
the nature of the business.

 Financial risk is determined by the firm’s capital structure or sources of

financing.

 Liquidity risk is associated with the uncertainty created by the inability to

sell the investment quickly for cash

 Default risk is related to the probability that some or all of the initial
investment will not be returned.

 Interest rate risk is the potential for investment losses that result from a
change in interest rates. 

 Management risk involves the possible risk associated by the decisions

made by the firm’s management and board of directors.

 Purchasing power risk is the chance that the cash flows from an
investment won't be worth as much in the future because of changes
in purchasing power due to inflation.

14.   Manufacturing, trading and service concerns

A. Market Risk

 Product Risk

o Complexity

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 o Obsolescence

o Research and Development

o Packaging

o Delivery of Warranties

 Competitor Risk

o Pricing Strategy

o Market Share

o Market Strategy

B. Operations Risk

 Process Stoppage

 Health and Safety

 After Sales Service Failure

 Environmental

 Technological Obsolescence

 Integrity

o Management Fraud

o Employee Fraud

o Illegal Acts

C. Financial Risk

 Interest Rates Value

 Foreign Currency

 Liquidity

 Derivative

 Viability

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 D. Business Risk

 Regulatory Change

 Reputation

 Political

 Regulatory and Legal

 Shareholder Relations

 Credit Rating

 Capital Availability

 Business Interruptions

15.   Financial institutions

Financial Non-Financial
 Liquidity Risk  Operational Risk

 Market Risk o Systems

o Currency  Information
Processing

o Equity  Technology

o Commodity o Customer Satisfaction

 Credit Risk o Human Resources

o Counterparty o Fraud and Illegal Acts

o Trading o Bankcruptcy

o Commercial  Regulatory Risk

 Loans o Capital Adequacy

 Guarantees o Compliance

 Market Liquidity Risk o Taxation

o Currency Rates o Changing laws and policies

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 o Interest Rates  Environment Risk

o Bond and Equity Prices o Politics

 Hedged Positions Risk o Natural disasters

 Portfolio Exposure Risk o War

 Derivative Risk o Terrorism

 Accounting Information Risk  Integrity Risk

o Completeness o Reputation

o Accuracy  Leadership Risk

 Financial Reporting Risk o Turnover

o Adequacy o Succession

o Completeness

16.   What are the categories of the techniques in managing risk as suggested

by ISO 31000?

 Risk Avoidance

 Risk Reduction

 Sharing

 Retention

17.   How do you apply the Basel II framework in managing risk?

It breaks risks into market risk, credit risk and operational risk and specifies
methods for calculating capital requirements for each of these components.

18.   What are the most commonly encountered areas of RM?

1. Enterprise risk management

2. Risk management activities as applied to project management

3. Risk management for megaprojects

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 4. Risk management of information technology

5. Risk management techniques in petroleum and natural gas.

19.   Study the simplified framework of enterprise-wide RM system vis-à-vis

top management’s involvement.

The diagram shows that the top management has to be involved in the
oversight activities and risk management process. The top management must set
management policy, ensure that process covers all risks, ensuring usage of tools
and methodologies, review plans, evaluate reports and recommendations. These are
then actualized through the five-step risk management process. The steps include
assessing of risk, developing action plan, implementing action plans, monitoring
performance, and improving risk management capabilities respectively.

20.   What is the SEC requirement pertaining to ERM of publicly listed

corporation? (Principle, Recommendation and Explanation)

Principle 12 deals with strengthening the Internal Control System and

Enterprise Risk Management Framework.

Recommendation 2.11 stand corresponding explanation provide the

following

“The Board should oversee that a sound enterprise risk management

(ERM) framework is in place to effectively identify, monitor, assess and
manage key business risks. The risk management framework should guide
the Board in identifying units/business lines and enterprise-level risk
exposures, as well as the effectiveness of risk management strategies.

Risk management policy is part and parcel of a corporation’s corporate

strategy. The Board is responsible for defining the company’s level of risk
tolerance and providing oversight over it risk management policies and
procedures.”

21.   What is the role of the board in relation to RM framework?

The Board should oversee that a sound enterprise risk management (ERM)
framework is in place to effectively identify, monitor, assess and manage key
business risk.

22.   Summarize the steps in the RM process.

1. Set up a separate risk management committee chaired by a board

member.

2. Ensure that a formal comprehensive risk management system is in

place.

3. Assess whether the formal system process the necessary elements.

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 4. Evaluate the effectiveness of the various steps in the assessment of
the comprehensive risks faced by the business firm.

5. Assess if management has developed and implemented the suitable

risk management strategies and evaluate their effectiveness.

6. Evaluate if management has designed and implemented risk

management capabilities.

7. Assess management’s effort to monitor overall company risk

management performance and to improve continuously the firm’s
capabilities.

8. See to it that best practices as well as mistakes are shared by all. This
involves regular communication of results and feedback to all
concerned.

9. Assess regularly the level of sophistication of the firm’s risk

management system.

10. Hire experts when needed.

CHAPTER 12

1.       What is the defining characteristic of an entrepreneurial decision maker?

It is the willingness and readiness to take personal and financial risks.

2.       How do successful businessmen and decision-makers deal with risks?

They make sure that the risks resulting from their decisions are measured,
understood and as far as possible eliminated. In addition, they go beyond the direct
financial perspective and actively manage risk as it affects the whole organization.

3.       What is the significance of identifying and prioritizing risks?

This makes it easier to avoid unnecessary surprises.

4.       What are the typical areas of organizational risk?

 Financial

 Commercial

 Strategic

 Technical

 Operational

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5.       How is an acceptable level of risk considered?

Determine the nature and extent of the risks the business will accept, assess
the likelihood of risks becoming reality and their effect, and consider opportunity cost
associated with risk.

6.       After identifying the risk, what is the reason for raking them?

This helps to highlight not only where things might go wrong and what their
impact would be, but also how, why and where these catalysts might be triggered.

7.       What are the risk catalysts? Summarize each.

 Technology. New hardware, software or system configurations can

trigger risks, as can new demands on existing information systems and
technology.

 Organizational change. Risks can be triggered by new management

structures, reporting lines, new strategies and commercial agreements.

 Processes. New products, markets and acquisitions all cause change

and can trigger risks.

 People. Hiring new employees, losing key people, poor succession

planning, or weak people management can all create dislocation, but
the main danger is behavior.

 External factors. Changes to regulation and political, economic or

social developments can all affect strategic decisions by bringing to the
surface risks that may have lain hidden.

8.       What are the stages involved in managing enterprise-wide risk that are
inherent in decision making? Summarize each

 First, assess and analyze risks resulting from a decision by identifying

and quantifying them (Risk Assessment and Analysis).

 Second, consider how best to avoid or mitigate them (Risk

Management and Control).

o Avoiding and Mitigating Risks

o Create a Positive Climate for Mitigating Risk

o Overcoming the Fear of Risk

 Third, take action to manage control and monitor the risks (Controlling
and Monitoring Enterprise-Wide Risk).

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9.       Enumerate the practical considerations in managing and reducing
financial risk.  Summarize the factors involved in each type of consideration.

 Improving Profitability

A. Variance Analysis

B. Assessment of Market Entry and Exit Barriers

C. Break-even Analysis

D. Controlling Costs

o Focus on the big items of expenditure

o Be cost aware

o Maintain and balance between costs and quality

o Use budgets for dynamic financial management

o Develop a positive attitude to budgeting

o Eliminate waste

Practical Techniques to Improve Profitability

o Focus decision-making on the most profitable areas

o Decide how to treat the least profitable products

o Make sure new products enhance overall profitability

o Manage development and production decisions

o Set the buying policy

o Consider how to create greater value from existing customers

and products to enhance profitability

o Consider how to increase profitability by managing people

 Avoiding Pitfalls

o Financial expertise must be widely available

o Consider the impact of financial decisions

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 o Avoid weak budgetary control

o Understand the impact of cash flow

o Know where the risk lies

 Reduce Financial Risk (Positive replies to the following Questions

would assist top management to manage financial risk)

o Are the most effective performance measures in place?

o Have you analyzed key business ratios recently?

o Is there a positive attitude to budgets?

o Does decision-making focus on profitable products or is it

preoccupied with peripheral issues?

o What are the least profitable parts of the organization?

o Are market and customer decisions focused on improving

profitability?

o How efficiently is cash managed?

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