Wednesday, 10 June 2015

ARE YOU HUNGRY FOR A LITTLE RISK?




"Risk is what an entrepreneur eats for breakfast. It's what she slips into bed with at night. If you have no appetite for this stuff, or no ability to digest it, then get out of the game right now."
                       
By Heather Robertson
                      
 
As we know, no investments are without risk. But how much risk should our company take? Well, it depends on the risk appetite. If we want to analyze the level and type of risk that an organisation is able and willing to assume in order to meet their strategic aims the company has to define clearly its risk appetite. Beside the risk appetite a strong risk culture is also essential for a financial organisation. Risk culture is more complex. It covers tangible and intangible items such as the behaviors and attitude of the company’s employee, several mechanisms like rewarding the employees, governing the risk, setting standards and roles.
Risk culture and appetite and their impact on risk management have become a preeminent issue
 for executive management and the Board.
          
If you want to know how to establish a stable and strong risk culture here you can read the key activities:
          
First of all, define a well –expressed culture statement, implementation method and policy. Start at the top of the organization: at board and senior management. Establish a very strong firm-wide vision, define the appropriate risk behavior and ethics, and set statements for values and culture. These will reflect how the company does business and how the firm’s environment-the share and stakeholders, employees, customers and regulators etc. - will perceive it. The best is to sum up all these things into one firm-wide massage. Clearly describe the roles, responsibilities and expectations.
                      
 
After you created a certain risk culture you have to continually reinforce it by communications and training. It is important to recruit the right people who perfectly match both culturally and professionally with the company. The risk culture must be reinforced formally and informally, all levels through ongoing trainings, meetings and events, orientations, and also in
 day-to-day business life. For example, it is a good way to increase knowledge and understanding of risk through workshop programs.
                      
 
The next step is to embed risk thinking through risk appetite.
At a well functioning company everybody has to be a risk manager as everyone at the firm is responsible for the risk. Therefore, it is essential to set the company's risk appetite. A good risk appetite statement's (RAS) features are:
  • Short and simple- all members of the company have to understand and remember it.
  • forward-looking-it is also an outlook for the future and it describes the company’s risk profile
  • a sufficient buffer between risk appetite and risk capacity
  • set real boundaries that account for severe stress
  • It covers all fundamental risks
  • It consists of  limited number of quantitative and qualitative risk statements
  • It should be set such that there is a sufficient buffer between risk appetite and risk capacity, even under stress.


          

Monitor employee behavior for new trends, and attitudes.

Every organization has a different level of risk appetite. Some of them prefer the risk seeking policy; some are not willing to take the high-risked assets. That's why it is important to create a well-balanced risk culture framework. If it is well defined than the employee will be empowered to report risk and become proactive in 'doing the right thing'. It will increase the whole organization's performance.



Sources: Documents and articles from: www.ey.com, www.deliotte.comwww.kpmg.com and www.corporatecomplianceinsights.com

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