Friday, October 22, 2010

Why is Risk Management Important?

Corporations operate in a dynamic environment,Hence the future remains uncertain to a large extent, allowing for fate to play a part in the results that are achieved by the companies.
However, the role of fate has reduced considerably over the years with the help of probability theory and careful evaluation of the environment, companies are now able to predict, to some extent, the various risks that may have a critical impact on their business.
The primary objective of any company is to maximize shareholders' wealth. The shareholders appoint agents (read managers) who take various investing and financing decisions to achieve the firm's objectives with the main criteria are to maximize returns and minimize risks related to any decision. The point of discussion in this article is the part of decision-making that deals with minimizing risk, Ignorance or mismanagement of risk will result in loss of shareholders' wealth and loss of reputation apart from other undesirable consequences. A number of cases have occurred in the recent past which very well brings to light the lack of foresight and pro-activity on the part of the management in managing risk. 'Risk management' therefore is an integral part of managing a business. From the recent devastation in the United States, we have come to realise that companies like Wal-Mart and Home Depot, which have active risk management programmes in place were much better poised to deal with hurricane Katrina than the government or other companies who have not yet embraced the advantages of risk management.

The Author is a faculty member at the ICFAI Institute for Management Teachers, Hyderabad.

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