2 The importance of managing risk
Now watch Video 2 from the experts on why risk management is important.
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Transcript: Video 2 Why is risk management important?
SPEAKER 1:
Risk management is important because it's all about intaking intelligent decisions and having the information to do so. If we don't make those decisions or we don't make them accurately, someone could get hurt, we could harm the environment, or we could lose money.
SPEAKER 2:
Risk management is important because it's really about helping people to be more successful. So we want to set out to try and achieve something. If we think about all the things that may happen that might stop us achieving something, or even help us to achieve more, it will help us to focus on those things, put some specific, timely actions in place. And then hopefully, at the end, we're more successful as a result,
SPEAKER 3:
It preserves value in the sense that let's preserve what we already have. So we're trying to manage all the risks that the organisation is facing, but it also looks to create value as well to make sure that you don't lose unnecessarily opportunities or you lose out to the competition.
SPEAKER 4:
Risk management does many things for us. If we're doing it effectively, if we're managing risks effectively, it makes us make better decisions. It gives us more transparency and actually lets us share transparency with others, which is just as important. It allows us to forecast things more credibly as well. People think that, well, if something makes more money or we do something faster, that's always a good thing.
Well, in particular complex organisations, it's not necessarily a good thing. It could just be- it could be the lesser of two evils, but it can have downsides as well. So there's many facets to it. But frankly, we're more effective as an organisation, as people.
SPEAKER 5:
Businesses have to make multiple decisions every day. Businesses are there for a reason. They have to either turn a profit, or keep quality product, or whatever it might be to keep their customers happy and consumers happy. As we said earlier, a risk is around uncertainty. So all businesses have an element of uncertainty. And the more you can understand what that uncertainty is and what measures you might need to put in place to manage that uncertainty, the better decisions that can be made as far as your business is concerned. So the management of risk, therefore, underpins good business decisions.
SPEAKER 6:
You look at people who manage risk well, people like Richard Branson and other entrepreneurs. What they look to do is they look to minimise the downside and maximise the upside, therefore getting the maximum possible return for something. On the flip side of that, you look at people who manage risk badly or where risk has been managed badly, and you can end up with some horrific and tragic incidents, things like Piper Alpha, things like Deepwater Horizon. Or in a business context, you can end up with massive frauds and scandals.
So recently, for example, there's been the Tesco accounting fraud which has wiped billions of pounds off their share price. So I think risk management has a dual purpose- firstly in improving the performance of the business, making it even better and the returns even better, but also minimising those downsides or those bad things that could happen.
Video 2 Why is risk management important?
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Risk management is considered so important that many professional disciplines are encouraged to manage risks as part of their professional code.
As a good example take a look at the ‘Guidance on Risk’ set out by the UK’s Engineering Council (2011). The guidelines are as follows:
- Apply professional and responsible judgement and take a leadership role.
- Adopt a systematic and holistic approach to risk identification, assessment and management.
- Comply with legislation and codes, but be prepared to seek further improvements.
- Ensure good communication with the others involved.
- Ensure that lasting systems for oversight and scrutiny are in place.
- Contribute to public awareness of risk.
Indeed all UK companies listed on the Stock Exchange are expected to apply effective risk management as part of their compliance with the UK Corporate Governance Code.