The importance of risk management

Risk is an essential part of any organisation and the management of risk is essential to help preserve and create value for stakeholders. Little is certain in the world in which organisations operate, meaning that almost every decision that is made will have multiple potential outcomes.

Organisations exist to meet the needs of stakeholders. They inevitably make risky decisions that generate stakeholder value, while at the same time reducing the risk of adverse events such as pollution, injury or bankruptcy. To fulfil this need organisations must take risks that can yield positive benefits for stakeholders and reduce risks that could cause financial or physical harm. Balancing these two goals is far from easy.

“Whether consciously or not, all companies manage risk. Every activity that a company performs and every decision it makes involves risk. ”

Risk is both an input into the strategic decision-making process and an output. From an input perspective, the risk exposure that exists will influence the types of strategies that are chosen.

Risk management may be an essential activity but that does not mean all companies manage these risks effectively or devote sufficient resources to risk management. Managing a company effectively, including the adequate management of risk, requires significant time and financial resources: employees, managers or directors do not always appreciate the value of this investment. The media is full of stories of risky events that have affected organisations and their stakeholders, causing injury, disruption and financial loss. Day after day these serve as a strong reminder of the importance of effective risk management.