Risk management is the process of identifying, assessing, and controlling financial, legal, strategic, and security threats to a company’s operations. These risks come from a variety of sources, such as financial uncertainties, technology issues, strategic management errors, accidents, natural disasters, and legal liabilities.
Various institutions have developed risk management standards, such as the International Organization for Standardization with ISO 31000, the Project Management Institute (PMI), the National Institute of Standards and Technology (NIST), and actuarial societies. Methods, definitions, and objectives may vary depending on the chosen standard and each company’s specific context.
A good risk management program will help your organization better handle all its threats. This field of knowledge also assesses the relationship between different types of corporate risks and the domino effect they can have on your company’s strategic objectives.
Want to know the fundamental steps to managing this correctly? Then come with us as we explain this ahead of time!
Importance of risk management
An unexpected negative event can have various consequences for your organization. With luck, the impact will be reduced, in the order of a small effect on your quarterly investments—requiring a budget reorganization.
However, in the worst-case scenario, the event can be catastrophic and have serious consequences. In more extreme cases, the result is significant spending on damage containment or even the closure of your business.
Therefore, it is important for the sustainability of the organization that the board of directors takes risk management seriously. It is necessary to carefully evaluate the exposure to threats, the processes for dealing with risks, and the people responsible for managing them.
The proactive approach to risk management is becoming increasingly popular, frequently assessing the likelihood of facing different types of losses. At the same time, organizations can define which negative impacts are acceptable and which demand an immediate reaction.
This happens in opposition to the reactive approach, which was more common in past decades. In this case, companies corrected risks that materialized into damages in the past and only changed their practices after a new threat caused problems.
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Types of corporate risks
Enterprise risk management seeks to address six different types of threats, ranging from compliance issues to financial or security matters. These potential risks can negatively affect the work environment, threatening the future of your company and even the health of employees.
Check out the six types of corporate risks you may encounter below:
- Health and Safety: These threats can appear in various ways, both in offices and in factories or construction sites. They include physical, ergonomic, chemical, and biological issues that can affect employees’ health or physical well-being.
- Financial: Those that represent a possibility of sudden and immediate financial loss. Examples are fluctuating exchange rates, credit loss, and lack of liquidity.
- Reputation: Reputation risks can negatively affect the public’s perception of the company. Examples include news reports that portray the organization negatively or a social media post criticizing the company that goes viral.
- Operational: Possibilities of losses related to internal processes, people, or systems. They include IT system failures, fraud, lawsuits, among other situations.
- Compliance: Lack of compliance with laws, policies, or best business practices. It can result in financial or legal problems, ultimately leading to the company’s closure.
- Strategic: Threatens the company’s long-term future. It includes new competitors entering the market or technological advances that make your product obsolete.
What is ISO 31000
The best-known standard for enterprise risk management is ISO 31000, developed and maintained by the International Organization for Standardization (ISO). It describes a risk management process that can be used by any entity and includes the steps necessary to identify, assess, and manage threats to your organization.
Check out the five steps outlined by ISO below, which we will explain in more detail in the next section:
- Identify the risks faced by your organization;
- Analyze the likelihood and potential impact of each;
- Evaluate and prioritize threats based on your business objectives;
- Address risk conditions or create responses to them;
- Monitor the results of risk controls and make necessary adjustments.
For your organization to have a solid understanding of what is happening, the ISO 31000 certification process requires you to start by defining the scope of your risk management. Your team also needs to determine the business context in which it will fit, as well as create risk criteria.
The standard’s objective is to allow you to know how each identified risk is classified within the categorization of “acceptable” or “unacceptable.” From there, it is possible to define what actions should be taken to preserve and even improve your organization’s values.
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Fundamental steps for risk management
Risks, essential for strategic decisions, are the main cause of uncertainties in organizations and can impact their processes, activities, products, and services. Corporate risk management helps deal with these uncertainties, increasing the ability to generate value and enabling more efficient strategic decisions and effective organizational change.
A successful risk management approach can reduce the likelihood of adverse events and improve operational efficiency. Additionally, it provides benefits such as more accurate financial reporting, reduced cost of capital, and competitive advantage—even benefiting public service companies with better political and community support.
Follow the main steps for risk management:
1. Identification
The identification stage requires a thorough analysis, where all possible scenarios must be considered to ensure complete coverage of potential threats. The identified risks should be documented clearly and in detail to establish a common understanding among all stakeholders, ensuring the basis for effective mitigation measures.
Following ISO 31000 guidelines, risk identification should involve collaboration between different departments of the organization, promoting an integrated and comprehensive approach. This collaboration not only facilitates risk identification but also promotes digital transformation by ensuring that all teams are aligned toward operational excellence and compliance.
2. Assessment
Risk assessment involves analyzing the likelihood of their occurrence and the potential impact they may cause. This process serves to ensure compliance and promote operational efficiency in organizations.
The use of modular solutions within the context of digital transformation allows for a systematic approach, facilitating the identification and mitigation of risks in various functional areas. Collaboration between departments aids in the effective implementation of these processes, resulting in operational excellence that aligns with the company’s strategic objectives.
3. Treatment
An effective approach to risk treatment should be structured to consider how acceptable the risk in question is. In certain situations, the choice may be inaction, but this decision must be supported by rigorous analysis.
To promote compliance and efficiency in the organization, it is necessary to establish an appropriate action plan. It may include strategies to prevent, reduce, or transfer risks. Focusing on modular solutions and collaboration between various business functions maximizes integration and the effectiveness of risk management.
4. Monitoring
A continuous review process is essential for proactive risk management, reassessing threats, and monitoring the status of implemented treatments and controls. Periodic review ensures that mitigation measures are effective and adjusted as necessary.
Technology plays a crucial role in monitoring, allowing for real-time data collection and analysis. This facilitates the quick identification of new risks and the adaptation of management strategies.
5. Communication
Communication in each of these four previous steps is a fundamental part of an effective decision-making process in risk management. It ensures that all stakeholders are informed and aligned regarding risks and mitigation strategies.
Transparency in communication facilitates collaboration and trust between departments. This results in a faster and more coordinated response to emerging risks, strengthening organizational resilience.
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Conclusion
Implementing risk management is not just a matter of control but of sustainability and resilience for the company. With a solid strategy, each step works to protect the value and longevity of the business—from identification to monitoring and communication.
In an increasingly dynamic and globalized corporate scenario, risk management has become a strategic tool for making safe decisions, ensuring that companies not only face adversities but also thrive.
Looking for more efficiency and compliance in your operations? Our experts can help identify the best strategies for your company with SoftExpert solutions. Contact us today!
