Is risk management a cost function or an income function?

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Since businesses and corporations as well as banks and financial institutions have clung to the risk management function, two things have happened. First, most saw it as a regulatory imperative and believed that compliance was the company’s primary responsibility. Second, when companies began to practice risk management, it became more of their risk culture than a regulatory function. Globally, all businesses, banks and financial institutions have realized that we continue to live in a complex and uncertain world despite improvements in technology and data collection. However, few institutions realize that the costs incurred to implement good risk management practices would increase their revenues, even in the short term. How? Certainly not by simple data collection and modelling.

The current year and the years to come seem to present as many challenges as opportunities and there will be many more frontier institutions like Non-Governmental Organizations (NGOs) coming to interact with the rest of the business sector. It is difficult to predict or control with any degree of certainty the future, climate change, the environment and social governance would bring together private actors and NGOs.

For example, during the pandemic, the health of individuals in organizations, the migration of individuals from companies to their homes for fear of the Covid-19 epidemic, the relocation of people, working from home and its follow-up exposed many new risks and there are no models built to deal with these risks. But companies initially developed common-sense approaches to combat them. Governments have stepped in with fiscal, financial and non-fiscal support measures and the world has developed coping mechanisms.

Many countries have come to the conclusion that it is better to learn to live with these risks and deal with them than to avoid them. Assuming it is a cost function, can these risks be managed without incurring? If they are not committed, the survival of the companies would be seriously threatened. The profit curve is bumpy but the loss is minimized. and many businesses could return to normal in a few countries like India. China, continuing its lockdown due to higher risk mitigation, suffered the livelihood and growth risks.

The pandemic, more than the recession, has taught risk managers the lesson that risk management is a function of revenue. Furthermore, it also taught us that these short-term risks will also turn into opportunities. India has become the vaccine producer for the world. Pharmaceuticals, the packing and packaging industry and freight transport have seized the opportunity for sustainable growth.

E-commerce businesses of various hues have grown from small businesses to big ones. Food delivery companies like Zomato and Swiggy have shown this to be another business opportunity awaiting many. Several cafes have closed only to allow more households to become food producers to be delivered through e-commerce companies. A sea change has occurred in the growth trajectory of companies.

Cristian deRitis in an optimistic speech on GARP, says: ‘How much effort we put in to avoid a negative outcome depends on how much we discount the future. The higher the discount rate, the lower the value to us of avoiding a loss in the future.

A unified theory of risk management would allow for a coherent and integrated risk management function. People who are good at credit and operational risk would realize that they would need to improve their knowledge of all other forms of risk to increase business value. Such a unified theory of risk management provides better capabilities for identifying and assessing risks across geographic spaces and the spaces between credit, operational, market, reputation, and sovereign risk.

Enterprise risk management (ERM) companies must develop, train and cultivate risk management techniques that are easily understood by each staff member and other stakeholders to enable the culture of risk to thrive and thrive. thrive in the organization, not just confined to the booths of risk managers and chief risk managers. Realize that risk management enables profit growth. It is an investment and not a cost. The net result would be an effective risk culture and governance.

*The author is an economist and risk management specialist and his opinions are personal.



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The opinions expressed above are those of the author.



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