Formal and Informal Management of Risks - Essay Example

Formal and Informal Management of Risks The United Nations Educational, Scientific, and Cultural Organization provides a strong reason why people, business, and organizations must manage risks. According to the UNESCO (2009, p. 6), we live in a “fast-paced world, changing environment and constant innovation) in the sciences and technology” and the situation brings in not only opportunities but also risks. For the UNESCO (2009, p. 6), “risk is the expression of the likelihood and impact of uncertain and extreme event that, if it occurs, may impact positively (opportunity) or negatively (threat) on the achievement of a project or program objective.” Risk management addresses risks. In a manual designed for large projects and procurement, Cooper et al. (2004, p. 13) pointed out that the purpose of risk management is “to obtain better project outcomes, in terms of schedule, cost and operations performance.” According to Cooper et al., the key elements of risk management is the identification of risks, understanding them in terms of potential consequences, assessing risks in relation to other risks, applying strategies to risks in a cost-effective way given several risks that are present simultaneously (p. 13). The objective of risk management however is the identification and management of significant risks (Cooper et al., 2004, p. 14). This seems reasonable because not all risks are highly likely to cause damage. There are risks in which the probability of occurrence is likely small as well as risks in which the probability of occurrence is high and highly damaging at the same time. Situations also change. One risk may not be likely and highly damaging today but it can be highly likely and highly damaging a few months from now. For example, the ongoing economic risks that we are facing in the United States and the world today may not seem highly damaging today to quit investing in US stocks but it can be one day. Of course, there are several perceptions on the risk (as well as the opportunities) of investing in the US and some believe investing on the US stocks is risky. Nevertheless, some take the risks as opportunities to buy US stocks when their prices in the market are lower. US stocks or equities face risks differentially, some equities have high risks of being downgraded and some stocks have very low risks and some may even present opportunities. Perhaps, a wise decision would be to acquire equities in which prospects for upgrade are bright and shy away and dispose of equities in which the risk of severe downgrade is very high. Given this risk, one can monitor share prices on a daily and even hourly basis to see how events would unfold or reveal unseen or unforeseen risks and how the changing situation transforms some of the risks into serious threats. There can be a positive news though as some of what had appeared as risks would turn out as actually opportunities. Thus, monitoring on how the risks would unfold is a must. Investors can use indicators in monitoring risks. Price, price change, price change over time, speed of price change and price movements in relation to a price reference like the price of the stock or equity, a year ago, two years ago, three years ago, or based on the equity’s average price over a period or history. All these are indicators or variables from which indicators can be developed or devised to put up a monitoring system in how risks may developed and transform into serious threats or even opportunities. The monitoring system for example, may identify what indicators or variables to monitor as well as the schedule in which the monitoring should take place. Meanwhile, Wood et al. (2008, p. 15-26) focused on the management of risk as an element of risk governance and internal control. The Wood et al. (2008) perspective only emphasize that the management of risks must be considered as an everyday task of management. In way, however, life is also a management of risks. In living, for example, we are confronted with many risks: risk of bankruptcy with a major change in the prices of equity, hurricane, typhoon, drought, tsunami, earthquake, heat wave, climate change and the like. Some of the risks are particularly important at some periods and some become less important in a particular period. Our lives have informally developed a monitoring system for these. We listen to the news and we look at the sky before we leave home for school or work. Our lives have also unconsciously and informally pre-identified the risks at some point in our lives much earlier. We have also developed an informal system for risk identification and risk monitoring and a system for evaluation. However, Huntsman (2006, p. 4) developed one of the better formal ones. This is shown in Figure 1. Figure 1. Risk Management Source: Huntsman, 2006, p. 4 It will take a considerable number of pages to discuss the risk management framework of Huntsman (2006). In applying the framework to living, however, I believe one can start with a definition of our objectives, the identification of the means and threats to the attainment of our objectives, formulating or developing indicators on how best we can monitor the risk in a cost-effective way (like listening to news on a regular basis as well as looking at the sky for possible weather disturbance or fire in the neighborhood), doing a type of assessment or ranking which risk deserves an immediate response (is it the fire in the neighborhood or the equities, for example), and deciding on the appropriate risk response. Perhaps, the appropriate conclusion to make is that risks are inherent both in living and in business and project/program management. There is no other way but to be good at managing risks. It may be essence of managing life and of living life. References Cooper, D., Grey, S., Raymond, G., and Walker, P. (2004). Project risk management guidelines: Managing risks in large projects and procurements. West Sussex and New York: John Wiley and Sons Ltd. Huntsman (2006). A guide to risk management. North South Wales, Australia: Huntsman Tier-3 Pty Limited. UNESCO. (2009). Risk management training handbook. United Nations Educational, Scientific and Cultural Organization: Bureau of Strategic Planning. Woods, M., Lisley, P., and Kajuter, P. (2008). International risk management: System, internal control and corporate governance. Amsterdam: Elsevier. Read More