RISK MANAGEMENT: ITS IMPORTANCE AND REIMAGINING IT IN THE POST-COVID WORLD

Abstract

Risk in general is considered to be an important element in the complete structure of corporate governance and its functioning. In order to handle this risk, there has be a properly established process of identifying and analyzing the risks efficiently so that the company can go ahead and achieve its objectives without any problems. Studies reveal that failure of bank’s corporate governance and risk management have been the main causes of the 2008 financial crisis. Not only the financial crisis, but also many scandals that happened in the past which have outraged the financial community have revealed the serious flaws in the corporate governance. Therefore, from then risk management has become a key concern of the board of directors in order to strengthen the corporate governance of a particular organization.

Risk management is defined as following by Coleman, 2011: “Risk management is the art of using lessons from the past to mitigate misfortune and exploit future opportunities – in other words, the art of avoiding the stupid mistakes of yesterday while recognizing that nature can always create new ways for things to go wrong. Thus, risk management is much more than numbers; it is the art of using numbers and quantitative tools to actually manage risk. Risk is the central, maybe the central component of managing a financial organization.” 

In order to have an effective risk management in an organization, it is always best to have a risk management committee with a chairman as the head. However, the board has the responsibility to identify the risks to the organization and then look at the acceptable levels of the risks and monitor and control these detected risks. Good risk management must calculate and predict the influence of risks on a particular business, later after assessing the risks they have to choose between accepting or rejecting such risks and such acceptance or rejection depends on the tolerance levels of the organization towards such risks. If the particular organization sets up a committee for risk management which assesses the risks as a continuous process then such risk management structures can be useful for the other risk mitigation systems. A good risk management structure includes planning, cost controlling, organization and budgeting.

Once a risk is detected the following steps can be taken to handle the risks:

1. Risk Avoidance
2. Risk Mitigation
3. Risk Acceptance

However, effective risk management is not just about eliminating risk but a driving force for the business. The main aim of risk management is to understand and manage the risk once it’s communicated. The risk management has to be done on the basis of an enterprise-wide approach rather than just treating every business individually. The risk management at the end can be efficient in nature when the board is efficient in overseeing and handling the complete structure.

After the 2008 financial crisis, the Enron scandal and few other scandals, the organizations all around the world have taken measures to have effective risk management system as per the changed rules in the countries. By following the prescribed processes, risk management has kind of been a settled issue for now.

However, at present the complete world is dealing with the COVID-19 pandemic which has created a very serious crisis all over the world. This pandemic has brought in new and unique challenges in all the fields but especially for the corporations. Now, the board of directors are given the responsibility to look at the short-term and the long-term condition of the corporation and its business prospects in this crisis. One of the important issues which has to be looked after is the risks which this pandemic will bring in and how those risks should be handled. There have been studies conducted and insights being given from many organizations and universities. Few of these insights included the following suggestions:

• Enhancing the company’s existing reporting and information systems that are used by the board to provide oversight.
• Forming a committee.
• Enhancing communications with company management.
• Confirming the feasibility of the company’s disaster plan. 
• Evaluating potential disruptions to operations and business relationships. 

This paper will be mainly focusing on the risk management and its importance in the corporate governance structure in the past and in the present so that a good future can be established. The paper will start with an introduction of risk management and its importance. It will later on go and talk about the damages which can be done if a proper risk management is not done which will be explained using both the theory and the practical examples which happened in the world in the past decade (Enron scandal, 2008 financial crisis, etc.). 

The paper will then move on to talk about how the risk management has become a settled issue after following the proper mechanism. The paper will then move on to talk about the importance of risk management during this pandemic. Since everything has become completely unpredictable it’s important for the board and the risk management committees to bring in new mechanisms and ideas to handle the present situation so that the corporation do not face any further losses. There are organizations which have started studies and have given their insights which can help the businesses in handling the upcoming risks in the present situation and how they could be helpful. The paper would then be concluded with my personal views and suggestions towards the situation and how it could be handled in an effective way.