• Kirsten Saliba
  • 24 May 2022
  • 6.5 mins

Risk management is an important part of any organisation. It is the process of identifying, assessing and controlling financial, legal, strategic and security risks to your organisation’s capital, earnings and reputation.

Risk can come from many different sources within your organisation including financial uncertainty, management errors, accidents and more. If an unforeseen event catches you by surprise it could have a minor impact but, in the worst case, it could have huge ramifications and pose a significant financial burden on your operations.

What is Holistic Risk Management

Holistic Risk Management (HRM) is the process by which an organisation can identify and quantify all threats to its objectives. Once this has been done, it manages those threats by adapting existing structures. It differs from traditional risk management in two ways:

Firstly, it considers a wider range of risks and not just those that are ‘insurable’ or fortuitous’. It is widely agreed that far more risks apply to an organisation than those that are understood by the traditional underwriter.

Secondly, the process of minimising risk must become a mainstream management function and not something that can be left to insurance surveys and minimal compliance legislation. Risk management must become integral to everyone across the organisation, not just a few specialists within the company. Holistic Risk Management achieves this. Its effectiveness will largely depend on the quality of an organisation’s framework and culture with which it would need to integrate.

Risk assessments support HRM by breaking down traditional risk silos and opening the way for an integrated approach. Operational risk and its management generally lead the way when it comes to strategizing the risk appetite of cybersecurity organisational management.

Several elements make up a holistic approach to risk management:

  •       Organizational structure to understand risk across silos
  •       Management framework and policy management
  •       Analysis and measurement framework, or metrics.

The strength of an HRM program starts with company-wide decision-making capabilities. Financial institutions may spend most of the time on defining specific risks and developing risk profiles when compared to other industries as the financial impact is one of the key metrics when analysing or scoring risks. Other factors include velocity, likelihood, importance, and responsiveness.

The Growth of HRM

The last five years have included an increased focus on corporate risk management. Companies paid lip service to the idea of risk management for far too long and, In many cases implemented systems that did not stand up to any serious scrutiny or assessment. These programs often had a singular focus on Enterprise Risk Management (ERM).

Now, companies are pushing for improved risk management with a holistic perspective and overall risk management is fast becoming a priority with more sophisticated techniques and analysis for risk management.

This transformation and the new focus on risk management were not just a natural occurrence. It was pushed to the forefront as a result of the pandemic and the resulting supply chain disruptions that brought. Given the toll the pandemic has taken on businesses, risk management has taken a leading role in the corporate governance framework. Risk management planning has become a vital part of business sustainability. This will become even more critical in the context of environmental, social and corporate governance (ESG) where sustainability and overall risk management are critical.

Different Risks in Different Sectors

There are different types of risk environments, and these will depend on what sector your business is in and a wide variety of other influences that brings. Your company must come up with its specific risk management plan, one that takes into account the variables and subtleties of your particular sector

For example, in the automotive industry, most major companies need to monitor and prepare for supply chain risk so that their product is not disrupted. They also need to be aware of the drive to use other means to power vehicles– and mitigate the risk that alternative methods for fuel such as electricity as well as advances in self-driving cars.

But in other industries, like pharmaceuticals, supply isn’t the biggest risk, but rather the substantial investments into research and the potential development of new drugs. These drugs could fail, or not make it all the way to market, so this risk must be balanced against the need to keep new drugs safe and available based on current regulations.

When presented with these differences, it becomes clear why your company should have its own personalised risk management profile. Companies in similar sectors can, of course, learn from one another, using comparative analysis but, ultimately, it is up to the top-level individuals to create a specific plan to proactively confront risks to your company.

Effective Risk Management

Now that we know what is needed for an HRM approach, and that it needs to be specific to your particular exposures and risk appetite, let’s take a look at some factors that will allow you to adopt a more effective risk management style.

Strategic Decision Making

An effective way to make strategic decisions is to remove bias. When you take away the psychological or sociological biases from decision making, it can help strengthen your business model and approach to risk management. When the risk is actively reviewed and accounted for, you can make better, more informed decisions based on accurate performance data.

De-Biasing & Stress Testing

You should also take the time to evaluate whether or not biases have caused you and your organisation to overlook potential risks. It’s vital to know if you can withstand a potential risk and walk away relatively unharmed.

For this reason, stress testing is key to helping you develop an appropriate business model for risk management. Figure out where your greatest threats will from and create appropriate models of response to that threat. Test to see if the solutions hold up under the weight of the problem and, if any of them do, work towards making them a part of your business plan to mitigate risk.

Quality Products and Safety

When you invest in creating quality products and implementing effective safety standards, there is evidence it will increase your returns significantly. If you don’t have to deal with the costs associated with accidents and incidents, due to robust safety training or protective equipment, for example, there is less cost and less risk in the long run. In addition, when quality control metrics prove that a company places value on its products, services, or processes, there is an increased demand due to a better reputation with consumers.

Operative Controls

While navigating the world of risk management, it makes sense to have some controls in place to help deal with potential risks. Companies should have some risk management strategies in place in case of a supply chain disruption, for example. This way, if a problem does develop, you can avoid pricey remediation. Supply chain risk management can lead to improved cost predictability as well as the ability to maintain an optimal amount of inventory.

Strong Ethical Standards

Ethical controls can be put in place for all aspects of company management. Effective and meaningful social responsibility leads to increased brand awareness as well as heightened reputation. Customers are willing to pay more for a product from a company that they associate with having high standards.

Risk management is a critical part of any organisation’s strategy and Holistic Risk Management is the future of keeping your company safe, don’t get left behind.

About Sekuritance

The Sekuritance RegTech platform provides a single platform for every eGRC need, including end-to-end AML/CTF, CECL, FCPA, vendor management, beneficiary onboarding, investor check, card processing MFA checks, blockchain wallet checks, cyber-risk assessments, and other RegTech or Business Process Management requirements.

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