What is the definition of risk management? – Risk management is the process of planning, organizing, directing, and controlling the human and material resources of an organization. In short, it’s everything needed to minimize the risks and uncertainties exposed to that organization.
Uncertainties pose risks and opportunities, with the potential to destroy or create value. Enterprise risk management enables administrators to deal effectively with the uncertainties, risks, and opportunities associated with them, to improve the ability to generate value.
Value is maximized when an organization establishes strategies and objectives to achieve the optimal balance between growth targets and return on investment and the risks associated with them, as well as to exploit its resources effectively and efficiently in the pursuit of organizational goals.
What is the definition of risk management? According to ISO 31,000, effective risk management must meet the following principles:
- To protect and create value for organizations.
- To be an integral part of all organizational processes.
- To be considered in the decision-making process.
- To explicitly address uncertainty.
- To be systematic, structured and timely.
- To be based on the best information available.
- To be aligned with the internal and external environments of the organization, as well as the risk profile.
- To consider human and cultural factors.
- To be transparent and inclusive.
- To be dynamic, interactive and able to react to changes.
- To allow the continuous improvement of the organization’s processes.
What is the definition of risk management?
Enterprise risk management deals with risks and opportunities that affect the creation or preservation of value, defined as a process conducted in an organization by the board of directors, managers, and employees. It’s applied through establishing strategies and is designed to identify all of the potential events that might affect it, as well as manage risk to keep it consistent with the organization’s risk appetite, to provide reasonable assurance regarding the achievement of objectives.
Events can have a negative or positive impact or even both. Those that generate negative impacts represent risks that may prevent the creation of value or even destroy existing value. Positive impacts may offset the negative impact or could present opportunities, which in turn represent the possibility of an event occurring and favorably influencing the achievement of objectives, supporting the creation or preservation of value.
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Key purposes of risk management
To align risk appetite with the strategy adopted – administrators assess the organization’s risk appetite to analyze the strategies, define the objectives related to them and develop mechanisms to manage these risks.
To strengthen the decisions in response to risks – enterprise risk management provides precision in the identification and selection of alternative risk responses – how to avoid, reduce, share and accept risks.
To reduce surprises and operating losses – organizations are better able to identify potential events and establish responses, thus, reducing surprises and associated costs or losses.
To identify and manage multiple risks inside enterprises – every organization faces a range of risks that can affect different areas of the organization. Enterprise risk management enables an effective response to inter-related impacts and also integrated responses to various risks.
To take advantage of opportunities – because by considering all potential events, the organization is positioned to identify and seize on opportunities proactively.
To optimize capital – by obtaining adequate information about risks enables the administration to conduct an effective assessment of the capital needs as a whole and improve the allocation of that capital.