Risk management is a core function of contemporary institutions because organizations as complex adaptive systems are not easily controllable. Businesses need to adopt sound corporate governance as a roadmap to ensuring that risks are understood, managed, and properly communicated. It is a truism that the proper identification and comprehensive management of risk should be at the centre of any risk governance standards. Based on the complexity and volatility of the business operating environment, the governance standards in modern organizations should place sufficient emphasis on ex ante identification of risk as a prerequisite for building high performance organizations. Organizations should ensure adequate strategic, compliance, innovation and operational risk management in addition to giving due consideration to both financial and non-financial risks that are prevalent in the business environment.
Corporate leaders play an essential role in reviewing and guiding corporate policy and ensuring the implementation of appropriate risk management systems in an organization. It is the responsibility of corporate leaders to set the risk policy by specifying the types and degree of risk that a company is willing to accept in pursuit of its goals and the overall strategic intent. The adoption of the Fitness Landscape Theory principles is essential in guiding risk management through discovery of new insights and understanding about the interrelationships between internal characteristics and the external environment of businesses.
The Global Financial Crisis 2008/09 emanated from a widespread failure of risk management, primarily because risk was not managed on an enterprise basis and was not adjusted to corporate strategy. To ensure organizational effectiveness, organizations should therefore adopt sound corporate governance principles. This demands for the implementation of risk management on an enterprise-wide basis; hence the board of directors should be actively engaged in establishing and overseeing the overall risk management structure of an organization. The Global Financial crisis exposed a number of risk governance weaknesses in major institutions, relating to the roles and responsibilities of corporate boards, the firm-wide risk management function, and the independent assessment of risk.
Strategic transformational planning is essential in ensuring effective risk management and making critical decisions. This is because strategic transformational planning helps an organization to modify its business processes through adjusting policies, procedures and processes to minimize strategic, innovation, operational and other risks. Effective strategic transformational planning supports effective risk management through the determination of an organization’s corporate governance structure. Strategic transformational planning supports effective risk management through its focus on the following organizational dimensions: standardization, sophistication, structure, systemization, superiority, commitment, comprehensiveness, significance, and suppleness of the overall planning process and programmes. These dimensions are in line with the Enterprise-wide Risk Management approach and are essential methods of optimal solutions in contemporary organization. The essence of strategic transformational planning and risk management is to ensure organizational effectiveness, mitigation of conflicts of interests, and proper accountability of the organization to all stakeholders.
Risk management is defined as the identification, assessment, and prioritization of risks. The ISO31000 defines risk management as the effect of uncertainty on objectives (whether positive or negative) followed by coordinated and economical application of resources to minimize, monitor and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities.
Risk management is an integral pillar to organizational effectiveness as it drives organizational stability and solvency. Risk is inevitable in dynamic systems, as a result of the chaos characteristics of the modern organization. Most organizations and systems are highly disorganized and unordered, that is they are in a chaos state. To ensure organizational effectiveness, the implementation of a risk management approach that identifies, assesses, analyzes, mitigates, monitors and report financial and non-financial risks is a necessity. The risk governance framework should comprehensively define the responsibilities of board of directors, C-suite leaders, management and other employees. These responsibilities include: monitoring the control environment, reviewing and approving the management-developed strategy, and ensuring compliance of the institution with its legal and regulatory requirements. The risk governance methodologies should be premised on the four pillars of corporate governance, that is, accountability, fairness, transparency and responsibility. The Sarbanes Oxley Act of 2002 is an essential tool to enhancing the risk governance structure of an organization. Risk governance goes beyond mere critical study of complex, interacting networks in which choices and decisions are made. It encompasses a set of normative principles which inform all relevant actors of society on how to deal responsibly with risks.
In view of complexity science and Systems Thinking, the adoption of the Enterprise Risk Management framework is a necessity in enhancing sound corporate governance and subsequently organizational effectiveness. Organizations should focus their efforts on and beyond the four categories of business objectives: strategic, operations, reporting, and compliance. This requires the adoption of the connectivity matrix as a risk management tool in complex adaptive systems. A structured, holistic and integrative risk management approach based on Systems Thinking and Appreciative Inquiry should be adopted at all times in order to effectively identify and manage adaptations and interactions of risks. Risk convergence is essential in enhancing the risk management process and managing complexity risk in dynamic systems. This is a process of integrating different risk functions to streamline risk management. Converging risk management into an enterprise-wide framework will provide a platform to deliver the true picture of risk to the board and offers scope for significant cost saving. The 12 dimensions of the Burke-Litwin Model can be used in enhancing the risk management of modern organizations. The organizations’ risk management methodologies should be strengthened by defining clearly the risk appetite and developing and updating the risk profile. This should be supported by effective risk communication strategy.
Adapted from: Chinoperekweyi, J. (2018) Corporate Governance in Banking: Nuggets from Canada, Georgia, Germany, U.K., and Zimbabwe. India: Notion Press
Dr. Justine Chinoperekweyi is currently serving as the Academic Director for Business Professionals Education Centre (BPEC). Justine is a published Author, Organization Development & Corporate Governance Expert, and Practice Academic in OD and Finance. Justine can be reached at firstname.lastname@example.org . For more information about our programs, visit our website www.bpc.ae
Business Professionals Education Center is an educational institution established in 2003 which provides programs for Abu Dhabi’s community. From the initial programs offered such CPA, CMA and CFA, BPEC is now a Registered Training Provider in UAE which offers regulated qualification awarded by the UAE government for Senior High School; and HNC, HND and Postgraduate Programs. BPEC is considered as the first choice and leader of vocational education in Abu Dhabi being licensed by the Department of Economic Development (DED) regulated by the National Qualifications Authority (NQA) and Abu Dhabi Centre for Technical and Vocational Education Training (ACTVET). BPEC is also supported by human resource talents to guarantee high satisfaction of all stakeholders for educational services. Globally, BPEC considers the strategic business relationship to high ranking Universities and awarding bodies that guarantees employability of the students after graduation.