Earlier last week, Credit Suisse revealed its first-quarter results and the impressive loss it made on dubious investments towards hedge funds. What's staggering is that it was owned by Bill Hwang. An investor banned in 2014 from trading in Hong Kong for four years and accused of insider trading in 2012 by the US securities and exchange commission. This event proves the importance of risk management, regardless of your size or your industry.
What is Risk Management?
According to ISO 31000, it is the process of identifying, assessing and controlling threats to an organizations' capital, safety or earnings. These risks can stem from numerous sources such as Finance, legal compliances, strategic management errors, neglecting the environment (natural disaster or a war zone) or misjudging companies.
Previous examples of poor risk management policy and its effects on companies/organizations:
Credit Suisse losing $4.5Bn in an operation involving a previously convicted trader
BP neglecting critical quality standards because of a high-risk tolerance and cost over quality culture resulting in paying over $61.5Bn in fines as of June 2016
Boeing ignored safety testing of its 737MAX planes because of time and cost over quality culture resulting in 346 people dying and roughly $20-$25Bn in fines and maintenance cost due to their grounding for a year
To some extent infection risks of coronavirus underestimated by some countries
How can it impact your business?
First of all, considering the long-term impact it may have through the fines or other additional costs that the companies listed above have incurred, we can easily understand how impactful it can be to underestimate or neglect any risks.
Regardless of the type of business you may have, its size or its industry, having a high-risk tolerance policy may lead to:
Neglecting regulations often leads to lawsuits, particularly if proven that you were well aware of the consequences. Trials, in the best-case scenario, will cost you money because of legal representation (The average business legal representation costs is around $700 per hour if you want a senior lawyer) and even may affect your overall customer image as, depending on the severity, it may be disclosed to the public. In the worst case, you will pay a fine (that largely depends on the severity of the case) or will have to shut your business.
2. Catastrophic losses
Underestimating risks often lead to fines or the end of your business. Moreover, it will affect your public image and the client's trust, including the financial institutions'.
3. Harder to thrive on the long-term
Empirical evidence suggests that it is much harder for a previously convicted business to find clients or negotiate contracts with supplier/ financial institutions. When it is young or does not have a solid reputation on the market, having a high-risk tolerance policy may delay its growth. Suppliers or financial institutions facing this risk will generally increase their prices as insurance against high-risk operations.
How to identify risk?
Let's face it, it is hard to identify all risks as some may not even exist at the time of your analysis. Take the example of COVID. Who knew that 2020 would be stained by a global pandemic? Even if their impact is colossal on the economy, they are relatively rare compared to the more "usual" risks that need to be managed daily by most companies.
The less complicated risk to identify is the legal/ compliance risk. Making sure that your product/ service/ strategy complies with the country's regulation is primordial. In some countries, it might be harder to mitigate those but in general, it relatively easy to identify them.
For the other types of risks, you will need to consider having contingency plans (i.e. backup plans if things go bad) and assess the risks depending on how badly they can affect your business. Assessing by using historical data from similar events that occurred in the past.
A note from Sepec Consults SAS
Even if risk management may seem contradictory, it is important to consider in all your plans/ strategy that events may severely affect your business. Over the years, we have seen too many companies taking substantial risks for various reasons but most of the consequences they had has been a result of their decisions and subsequent culture. At Sepec Consults we have the competency and the experience to identify these risks and assist your business in its overall development.
For any queries and/or support needed, contact us today and let's reshape tomorrow's image!
Article written by SEPEC CONSULTS SAS