Corporate Risk Management Strategies
Corporate companies have established methods to identify and analyze the risks connected with it. Risk management is the practice of assessing the potential risks associated with planned operations. This paper discusses the strategies developed by Dr. James Kallman and Professor Georges Dionne.
Risk Management as a Corporate Decision-Making Process
According to Kallman (2005), risk management is a component of the corporate decision-making process, which includes a number of procedures in business operations. It entails planning, organizing, regulating, and monitoring the resources allotted. The method necessitates the risk manager's foresight on the intended path in operation. In planning a target risk offers a guide to the organization by achieving its goals by minimizing derailing obstacles to organization’s success path. Risk managers are expected to make a decision relating to the available resources and relevant to the organization's goal. The decision-making process requires through in-depth analysis, evaluation of alternatives and capacity of the organization. The success of the decision depends on the perspective of the organization to embrace the ideal measures to attain the objectives.
The Role of Risk Management in Ongoing Processes
A well-planned risk management system provides the guideline for realistic actions to take during the ongoing process of the plan. Risk managers active participation in overseeing the possible outcome is required for flexibility and dynamic environment. Risk managers are expected to restrain from taking any haphazard action and handle the situation proactively to protect the organization from unfavorable results (Kallman, 2005).
The Importance of Target Actions and Changing Conditions
The technique is similar to the George Dionee’s financial risk management strategy that emphasizes the impact of various steps taken. It suggests taking radical and realistic actions in approaching the target goals. These two measures require re-aligning the goals according to the target actions to reflect the changing conditions (Dionee, 2009).
The Combination of Probability and Consequences
This technique ensures that the actions taken by the changed situation will not endanger the achievable target. Goals are set in the planning phase but in the changed situation, some action may go against the planned actions to protect the larger interest of the organization. According to George Dionee (2009) a pure risk is the combination of the probability of the incident and consequences which is normally negative.
The Role of Uncertainty and Variances in Decision-Making
He added that uncertainty is less precise because the probability of an uncertain event is often unknown as well as the consequences. Kallman suggests that if one of the parameters such as variance is not within the desired range then it is wise to spend the resources to get the parameter in the desired range.
Hedging and Derivatives for Risk Management
The risk affects the creditors and shareholders of the financial institutions that’s why the regulations of financial institutions are justified. The agents are paid for the risk they take and have access to monitoring instruments that gives useful information. Kallman and Dionee both recommend using various hedging and derivatives tools for speculative risk management. But Dionee has emphasized more on the safe projects when the situation is very risky or uncertain. Whereas Kallman thinks it is wise to add profitable options to a product that may enhance the desired revenue in contrast to the pure risk situation where if the probability of loss is too high then the risk manager should spend resources on loss prevention project.
The Costs of Risk Management
Dr. James Kallman identified some costs of risk to be financed such as administration of risk management, loss financing, and risk control. All overheads for running risk management departments such as rent, salaries, consultation fees, and supplies are included in administration cost. The core target of risk management is to reduce the chances of loss and protect the valuable resources (Kallman, 2005).
Different Perspectives on Risk Costs
George Dionee (2009) differs in risk cost tenet. In his work, he mentioned various risk costs such as financial distress cost, risk premium to partners, expected income taxes etc. Though both authors of risk management differ in various aspects the main purpose of the risk management is to serve the organization to reduce the wastage of the resource and ensure the optimality of the business operations.
The Power of Prevention
The optimal state of the assets not only improves the productivity but also lowers the chance of loss. So the scholars of risk management suggest that prevention is the most powerful solution to controlling risk. The risk manager must decide whether to spend scarce resources when the risk level is accepted. Preventing the chances of losses is an important step for value creation and achieving goals. Dionee (2009) mentioned the relevance of moral hazard while controlling the risk through hedging and insurance when controlling the risk is less beneficial than bearing high risk.
Managing Risk and Protecting Resources
After all the discussion it can be inferred that though there are some differences in a notion of preventing the resources from damage or protecting the assets. The basic principles of managing risk are same. Both authors recommend accepting the risk when it is assumed that the organization can bear the risk. Though there are differences in costs of managing risk to protect the resources both mentioned some techniques to prevent losses most of which are similar. Both authors consider operation management is one of the most powerful tools for the risk manager. Many experiences prove that proper maintenance has a higher correlation with fewer losses.
References
:Kallman, J. (2005). Managing Risk. Risk Management, 52(12), 7-18.http://search.proquest.com/docview/227002247?acountid=227032521.
Dionee, G. (2009). Structured Finance, Risk management and the recent financial crisis. The Journal of Risk Insurance, 31(4), 463-492.
