The Risk Professor Series

What is Risk Management?

Poor risk management has been fingered as one of the principal reasons for the crisis in the Nations financial institutions, particular the banks. The five (5) banks whose CEOs have been relieved of their posts have also been accused of taking poor leadership decisions that resulted in huge risk exposures that threatened shareholder interest and depositors funds. The question is, what exactly is Risk Management and how can a poor risk management system lead to poor business performance. Risk Management is a system of processes that a company uses to identify, assess, quantify and control risks to achieving defined business objectives. Effective risk management practices supports an organization to achieve the following; Asset Protection- Protect the business from adverse events or occurrences as well as recognizing potential opportunities that conform to the companys management policy. Proper risk management strategies shield companies from risks arising from blind pursuit of untested market opportunities. By deviating from using traditionally stable collateral and security against loans, many banks succumbed to the temptation of using share certificates as collateral for funding increased activity in the stock market. The attraction of the quick profits from a stimulated stock market growth provided a very weak foundation for experienced managers to jettison their fundamentals and plunge too deep into trading in shares on the assumption that the upward price movement will never stop. Compliance- Ensures compliance with internal company management policies and external regulations by Government Agencies such as Central bank of Nigeria, Department of Petroleum Resources, etc Build Trust- by communicating the existence of strong values inculcated into regular principles and practice of effective risk assessment and management, customer and consumer confidence is boosted. People would rather do business with institutions they can trust. Enhance Sustainable profitability- Experienced managers are always cautious when emerging market trends in their industry generate huge returns on investment for almost any player. This is because the road to wealth and profits is never flat, common or popular. Effective risk management practices allow business managers to shield their operations from diverting to practices that expose them to high risks that are outside their control range. Although these might mean lower profits in the short run, the performance is more sustainable. As the positive momentum is sustained, geometric growth is likely to result from compounding effects over the years. Cost Savings- Good risk management systems save companies huge sums of money, time and resources. Timely risk assessments identify potential risks that if undetected may lead to very high mitigation costs if detected at an advanced stage of business or project implementation. A major satisfaction we get from the corporations we support is the significant cost savings that result from developing and implementing effective risk assessment and management systems.