Risk Management - Essay Example

Running head: risk management 28th October Table of Contents Table of Contents 2 Introduction 4Types of risks 5 Estimated risk 5 Observed risk 5 Real risk 5 Perceived risk 5 Risks and organizations 6 External risks 6 Political risks 6 Legislation risks 7 Technology 7 International risks 7 Media risks 7 Environmental risks 7 Internal risks 7 People 7 Contractual 8 Information technology 8 Risk management framework 8 Risk management process 9 Establishing the context 9 Identifying the risk 9 Analyzing the risks 9 Risk evaluation 9 Treatment of the risks 10 Communication and consultation 10 Monitoring and reviewing 10 Risk identification 10 Techniques for identification of risks 10 National Australia Bank 11 National Australia Bank risk management system 11 Table 1 Analyses of National Australia Bank risk management system 11 Conclusion 14 References 15 Appendix 18 Introduction In order to ensure that organizations are in a position to deal with the internal as well as external challenges that face them in the current competitive business atmosphere, it is imperative for them to have clear guidelines to deal with the risks. A risk is the effect of uncertainty on objectives. Notably, the effect entails the deviation from the expected results which can be positive or negative. The objectives can take any form for example financial, safety and health, as well as environmental goals. Key aspect to note for the objectives is that they can apply to different levels that include strategic, organization-wide, product and process as well as project. Risk is in most cases characterized by reference to possible events and results or a combination of the two (Banks, 2009).  Another point to note is that risk is usually expressed in terms of a combination of the results of an event and the associated likelihood of the occurrence. On the other hand, uncertainty refers to the state, even partial, of deficiency of vital information relating to knowledge or understanding of an event, or its likelihood (Smith, 2009). It is important to note that risks do not occur anyhow, they are as the result of a source or sources. Whenever a risk occurs, it has an impact on the activities of an organization there by affecting its objectives as well as the output. This paper aims at establishing what a good risk management framework looks like and then assessing the National Australia Bank (NAB) risk management framework against it. Being the biggest financial institution in Australia both in customer base and market capitalization, National Australia Bank offers its services to more than 12 million people. The bank offers wide range of services including consumer banking, wealth management, insurance, and wholesale banking. Types of risks For organizations to have a clear guideline on how to address the risks that occur, they have to identify the type of risks that are exposed to them (Banks, 2002). A proper risk management frame work indicates various types of risks that public companies can face. These include; Estimated risk This type of risk refers to the one that has been identified through some systematic ways or processes. Notably, it may involve calculations of data, modeling, and the probability of an event among other processes. Observed risk This entails a risk that occurs due to statistical observation on the same type of occurrences. Real risk This refers to something that we can never know. It implies that it is a risk that can easily be identified if an organization has access to all the variables and information (David, 2010). . One of the vital aspects of this concept is that it should be significantly considered since while firms are conducting their risk management activities, the term ‘real risk’ is likely to be applied many times. Perceived risk Perceived risk refers to the subjective degree of risk experienced by an organization, an individual or work area. Depending with the subjectivity of workers and their perceptions, perceived risk is not likely to be measurable (David, 2007). Nevertheless, it is a risk that should not be overlooked, given the materiality of corporate knowledge as well as experience that is needed in the planning table. Risks and organizations During their day to day operations, organizations make decisions to deal with the existing problems. On their part, senior managers should choose between the available options without having perfect information and thus they should be ready to deal with the risks. A good risk management framework must involve safety training based on the fact that during their duties, workers face heath and safety challenges (Dorfman, 2007).  Another role of the managers is to protect the organization form internal and external threats that are likely to have a significant impact on the organization. For example, the food poisoning in Garibaldi Smallgoods in 1994 to 1995 that resulted to customers’ illnesses and death resulted to negative image for the company that resulted to its collapse (Robert and Anette, 2012).  In this regard, an effective risk management framework should expose the mangers in public sectors to the different kinds of risks they face externally and internally. External risks Political risks These refer to the changes that may arise from an election results, as well as influences of the campaign groups among other factors. In countries where democracy is still not achieved in totality, post election violence is likely to occur, an aspect that negatively affects investments. Economic risks Economic risks refer to reduced tax revenue, macro economic factors as well as changes that may arise in the government funding policies (Hussain, 2000). Additionally, the budget of a country may impact on the performance of the organizations. Legislation risks The regulatory requirements as well as legislations that are passed by the law making bodies have implications on the performance of the public organizations as well as consumers Technology With the growing use of technology, organizations are likely to experience their impact. For example, the social media, and the increased use of digital connectivity in the banking sector as well as in the medical sector should be considered. International risks International risks occur due to the involvement of public organizations in foreign transactions and affairs, global financial performance, and disruptions that may occur at the global trade. Media risks Media risks arise due to the emergence of political or social issues that are sensitive in nature Environmental risks These types of risks are due to the challenges that arise in the areas that an organization operates in (Eysenck, 1992). For example, an expansion of an entity may be negatively affected due to the limitation of the land. Internal risks People As the result of lack of proper skills and qualifications, employees may not be productive an aspect that may jeopardize the operations of an organization. Similarly, managers must evaluate the commitment of workers to organization’s objectives. Contractual These relates to the obstacles that exist during the arrangement with the key partners. Similarly, the partnership that may arise between the public and private institutions may generate risks that may affect service delivery (Jha, 2013).  Information technology In order to improve the performance of their operations, companies have embarked on adopting the emerging information technology. However, there are risks that may arise due to system failure, loss of information, cyber damage, and incorrect data. Risk management framework With the information on the possible risks that public organizations are exposed to, managers are now in a position to undertake a risk management. Risk management refers to the identification, measurement and management of risks that have the potential to jeopardize the assets, reputation, business as well as the real or potential earnings of the organizations (Halligan and Skelly, 2002). There are key aspects that a good risk management should cover. First, it should explicitly address uncertainty. Secondly, it should be systematic, structured as well as being timely. Thirdly, it should be based on the best available information. Fourthly, it should be tailored in order to address the actual challenges faced by a firm. Fifthly, it should take into account cultural and human factors. Sixthly, it should be transparent and inclusive. Seventhly, it must be dynamic, iterative and responsive to change (Peter, 2014). Lastly, a good risk management framework should be in a position to facilitate continual improvement of the organization (Merna and Thani, 2008). According to ISO 31000, the systematic approach of dealing with risks involves three major steps that include identification, evaluation, and treatment. Risk management process Risk management process is characterized by five steps. Being quite universally accepted and used by many organizations, the steps are known to provide a strong and effective model to deal with the emerging risks. Through the use of a systematic approach, a firm is in a position to ensure that all its parts are involved in addressing the risks in almost the same manner (Hubbard, 2009). Likewise, the approach implies that all the parts are aware of the risks thereby adopting effective methods of treating the risks. Establishing the context Being the first step, it involves assessing the situation of the organization, its objectives, internal stakeholders, operating constraints, and the external stakeholders (Products, 2002). In this way, the manager is able to identify various issues that may generate a risk. Identifying the risk This step entails identification of the actual sources of risk and bringing about the description of the potential risk event Analyzing the risks As a third step, risk analysis involves the assessment of the risks by checking on their likelihood of occurring (Jodie, 1997). Additionally, the risks’ impact on the organization is assessed if at all the risk emanates. Risk evaluation This process involves determination of how important the risk is. This entails checking whether the risk is acceptable or unacceptable. Treatment of the risks This step entails the development of mitigation strategies with the aim of reducing either the likelihood of the risk event, or the consequence or both of them. Communication and consultation Communication and consultation is taken as the activities that occur during the entire process of risk management. Communication plans among the internal as well as external stakeholders should be done at early stages to avoid occurrence of risks (Richard, 2004). Effective communication also ensures that if a risk occurs, the organization would be in a position to deal with it effectively. To ensure that communication and consultation are done in the right way, a consultative team is formed (Saita, 2007).  Such a team would take into consideration the interest of the stakeholders, risk are properly identified, and diversity of expertise among other aspects. Monitoring and reviewing Monitoring and reviewing is on the other hand treated as the activity that the standard model indicates that it should be undertaken in a continued manner. Risk identification In order to effectively address the risk, it is essential for managers to identify the sources of risk, and their impact. The aim of the risk identification stage is to come up with a comprehensive list of risks in consideration of the events that may create, accelerate or cause delays in the achievement of the firm’s goals (Strecker and Huber, 2004). Techniques for identification of risks Based on the wide range number of factors that cause risks, it is imperative for a company to adopt appropriate techniques to identify the risks. Some of the notable ways of identifying risks include use of experts, use of breakdown structure, interviews and questionnaires, brainstorming, undertaking a SWOT analysis, and use of PESTEL factors (Hunt, 2010.).  National Australia Bank National Australia Bank is one of the largest financial institutions in Australia. With more than 1,800 branches and 4656 ATMS internationally, the bank is involved in wide range of transactions that requires close monitoring. The bank which is headed by Michael Chaney and Andrew Thorbum, the chairman and the chief executive officer respectively, the bank has adopted effective risk management framework to avoid loss of funds (Kabbes, 2007). In its effort to meet the needs of the customers as well as to expand its customer base, National Bank of Australia has embarked on merging with other institutions such as Commercial Banking Company of Sydney, Clydesdale Bank, Northern Bank, Bank of New Zealand, and MLC Limited. As such the bank is exposed to quite a number of risks that requires the managers to put in place effective measures to curb the challenges. National Australia Bank risk management system The table below provides a comparison of the good risk system and the risk management framework that National Australia Bank has adopted. Additionally, it provides recommendations to improve the risk management system. Table 1 Analyses of National Australia Bank risk management system What a good system looks like National Australia Bank Gap between the good system and NAB system Recommendations Has a standard model that consists of five steps that includes Establishing the context, Identifying the risk, Analyzing the risks, Risk evaluation, and Treatment of the risks (Humble, 2000) NAB has established the risk and categorized them into interest rate risk, uncleared swaps, foreign exchange risks, reduced share prices, political factors and loss of customer funds There lacks proper evaluation of risks in other countries Lack of proper risk assessment in Clydesdale and Yorkshire subsidiaries It is vital for the bank to undertake extensive risk evaluation before entering foreign countries Effective communication and consultation NAB maintains strong culture of communication and consultation to deal with the risks Through Banking Managers, NAB provides effective mechanism of communication between the bank and other stakeholders (Yates, 2000) Lack of strong consultation during establishing the Northern Bank , National Irish Bank, and Yorkshire Bank Through consultation between the top level mangers and stakeholders in subsidiaries is needed Monitoring and continuous review The bank regularly reviews its performance through the Centre for Social Impact and Net Balance The annual audit by the auditors ensures that the bank operations are in line with its objectives Failure to maintain close review in some of its subsidiaries results to reduction of share prices The bank should maintain close review that includes using experts to ascertain the performance of the parent company and the subsidiaries Risk identification NAB risk management department identifies the risk through use of experts including economic analysts and brainstorming during stakeholders engagement (Yates, 2000) The bank also undertakes interviews that involves the employees and customers Lack of proper risk identification especially in reference to uncleared swaps and diversification strategy The bank should use the government financial reports to identify the economic performance (Norman, 1999) NAB should ensure close monitoring of performance of other financial institutions before merging or acquiring other firms Conclusion Based on the above discussion, it is clear that risk management is an aspect that cannot be overlooked if a company wants to remain competitive. Before managers embark on effective ways of dealing with the risks at their disposal, it is vital to identify what kind of risks they are dealing with. Various types of risks include estimated risks, observed risks, perceived risks, and real risks. The discussion, which also covered the risk management system adopted by National Australia Bank, indicates that public sector face different kinds of risk due to the diversified working environment they are exposed to. For example, externally, public organizations may be exposed to political risks, economic risks, legislation, media, environmental, technology, social, and international. Internally, the firms may be exposed to people, contractual, physical, and IT risks. However, through the application of effective risk management process that entails the 5 steps namely establishing the context, identifying the risk, analyzing the risks, risk evaluation, and treatment of the risks a firm is in a position to deal with such risks (Smith, R. 2009). National Australia Bank has on its part maintained a strong risk management framework although it is faced with some challenges especially in the subsidiaries. By taking close monitoring of the risks as well as improving communication and consultation among the stakeholders are key strategies that the bank should undertake to deal with the risks. References Banks, E. 2009. Risk and financial catastrophe. New York: Palgrave Macmillan. Banks, E. 2002. The simple rules of risk revisiting the art of financial risk management. New York: J. Wiley. David, C. 2010. Leadership Risk: A Guide for Private Equity and Strategic Investors. John Wiley & Sons. David, H. 2007. Understanding and Managing Risk Attitude. Gower Publishing, Ltd. Dorfman, S. 2007. Introduction to Risk Management and Insurance. Englewood Cliffs, N.J: Prentice Hall. Eysenck, W. 1992. Anxiety and the Cognitive Perspective. Hillsdale: Lawrence Erlbaum Associates. Halligan, J and Skelly, L. 2002. Canberra. Bulletin of Public Administration, no.103, Mar 2002: 11-21 Hubbard, D. 2009. The Failure of Risk Management: Why Its Broken and How to Fix It. John Wiley & Sons. Humble, N. 2000. Mrs Beetons book of household management. New York: Oxford University Press. Hunt, B. 2010 Risk and Crisis Management in the Public Sector. Public Management Review Vol.12 (5), p.747-751 Hussain, A. 2000. Managing operational risk in financial markets. Oxford: Butterworth-Heinemann. Jha, K. 2013. Strong, safe, and resilient a strategic policy guide for disaster risk management in East Asia and the Pacific. Washington: World Bank Publications. Jodie, B. 1997. Implosion team has no answers, Sydney Morning Herald, Monday 14 July, 1997, p.1. Norman, J. 1999. Risk a lot or risk averse? Studies from the Southbank PPP Public Infrastructure Bulletin, 1(9) Peter, C. 2014. Royal Canberra Hospital implosion leaves enduring legacy, Riot ACT, 18 July 2014 http://the-riotact.com/royal-canberra-hospital-implosion-leaves-enduring-legacy/129884 Robert, K and Anette, M. 2012. Managing Risks: A New Framework. Available from http://hbr.org/2012/06/managing-risks-a-new-framework/ar/1 Smith, R. 2009. The literacy destruction of Canberra: Utopia, apocalypse and the national capital Australian Literary Studies, April, 2009, Vol.24 (1), p.78 (17) Yates, A. 2000. Technical Expertise as a Contributing Factor in Three Disasters. Australian Journal of Emergency Management The, Spring 2000, Vol.15 (3), p.2-6 Yates, A. 2000. Canberra. Bulletin of Public Administration, no.95, Mar 2000: 13-21 Kabbes, C. 2007. Restoring our natural habitat proceedings of the World Environmental and Water Resources Congress 2007, Tampa, Florida, USA. Reston, Va.: American Society of Civil Engineers. Merna, T and Thani, F. 2008.Corporate risk management. Chichester, England: Wiley. Products, I. 2002. Weather risk management: markets, products, and applications. Houndmills, Basingstoke, Hampshire: Palgrave. Richard, M. 2004. Risk management. Sydney, NSW: Standards Australia International, Ltd. Saita, F. 2007. Value at risk and bank capital management. Amsterdam: Elsevier Academic Press. Strecker, W and Huber, C. 2004.Urban drainage 2002 global solutions for urban drainage. Reston, Va.: American Society of Civil Engineers. Appendix Table 1 Analyses of National Australia Bank risk management system What a good system looks like National Australia Bank Gap between the good system and NAB system Recommendations Has a standard model that consists of five steps that includes Establishing the context, Identifying the risk, Analyzing the risks, Risk evaluation, and Treatment of the risks (Humble, 2000) NAB has established the risk and categorized them into interest rate risk, uncleared swaps, foreign exchange risks, reduced share prices, political factors and loss of customer funds There lacks proper evaluation of risks in other countries Lack of proper risk assessment in Clydesdale and Yorkshire subsidiaries It is vital for the bank to undertake extensive risk evaluation before entering foreign countries Effective communication and consultation NAB maintains strong culture of communication and consultation to deal with the risks Through Banking Managers, NAB provides effective mechanism of communication between the bank and other stakeholders (Yates, 2000) Lack of strong consultation during establishing the Northern Bank , National Irish Bank, and Yorkshire Bank Through consultation between the top level mangers and stakeholders in subsidiaries is needed Monitoring and continuous review The bank regularly reviews its performance through the Centre for Social Impact and Net Balance The annual audit by the auditors ensures that the bank operations are in line with its objectives Failure to maintain close review in some of its subsidiaries results to reduction of share prices The bank should maintain close review that includes using experts to ascertain the performance of the parent company and the subsidiaries Risk identification NAB risk management department identifies the risk through use of experts including economic analysts and brainstorming during stakeholders engagement (Yates, 2000) The bank also undertakes interviews that involves the employees and customers Lack of proper risk identification especially in reference to uncleared swaps and diversification strategy The bank should use the government financial reports to identify the economic performance (Norman, 1999) NAB should ensure close monitoring of performance of other financial institutions before merging or acquiring other firms Read More