The Importance of Risk Management
Risk management strategies are viewed by business owners and even perhaps boards of some not-for-profit entities as something that we really should address, but we just don’t have the time! There are more important and more pressing issues that we need to deal with first. We understand that risk management strategies form part of good corporate governance; we just don’t have the time right now to address it effectively.
Why then is it so important for business owners and boards to effectively address risk management in their organisations? There are several very good reasons:
- For most businesses, as risk levels rise the value of the business correspondingly falls.
- Directors of all organisations need to be very aware of their responsibilities and potential personal liability.
- Businesses and not-for-profit entities alike need a sustainable business model to ensure value and longevity.
- Directors and/or business owners have a responsibility to their stakeholders.
In our current economic climate and the aftermath of the global financial crisis (GFC), potential buyers of businesses and their advisors seem to be significantly more risk averse than they may have been prior to the GFC. That is, they are reluctant to buy businesses that are carrying too much risk and are certainly not inclined to pay premium prices for risky businesses. Global equity markets seem to be displaying considerable volatility as a direct result of investors sensitivity to risk or any perception of risk.
It doesn’t seem to matter whether potential business buyers are third parties or indeed employees or family members. They are reluctant to pay anything like premium prices for risky businesses. This is particularly the case where risks are not actively being managed to either minimise them or reduce their impact on the business. These risks might come from an unhealthy culture within the organisation, or an over reliance on a small number of customers, or digital disruption, or a sustained slowdown in customer enquiries, or too much reliance on the business owner or a key individual, or indeed a lack of any clear succession plan.
Active risk management is something that we should all be actively engaged in as directors and business owners.