Corporate risk management refers to all of the methods that a company uses to minimize financial losses. Risk managers, executives, line managers and middle managers, as well as all employees, perform practices to prevent loss exposure through internal controls of people and technologies. Risk management also relates to external threats to a corporation, such as the fluctuations in the financial market that affect its financial assets.
A corporation has at least one shareholder. A large corporation, such as a publicly-traded or employee-owned firm, has thousands, or even millions, of shareholders. Corporate risk management protects the investment of shareholders through specific measures to control risk. For example, a company needs to ensure that its funds for capital projects, such as construction or technology development, are protected until they are ready to use.
Types of Risk
Consider the types of risk that a corporation must address every day. A corporation may become insolvent if it hasn't bought insurance, implemented loss control measures and used other practices to prevent financial loss. Insurance is no substitute for successfully identifying measures to prevent losses, such as safety training to prevent worker injuries and deaths. Risks can include hazard risks, financial risks, personal injury and death, business interruption/loss of services, damage to a corporation's reputation, errors and omissions and lawsuits.
Probability and Consequences
To prevent financial losses, a corporation engages in a certain amount of speculation. A risk manager calculates the probability of each type of event that would damage the firm's financial position and the consequences. Calculating the likelihood that something will happen and its associated costs enables a risk manager to recommend ways to address the most probable risks to senior management, the board of directors and owners of the corporation.
A corporate risk manager is a multi-disciplinary professional with an understanding of internal business processes and many financial instruments. This professional might have a background in business management, finance, insurance or actuarial science. She might suggest solutions to a corporation to protect its assets. For instance, she might recommend buying millions of dollars in commercial liability insurance coverage. Some risks that she calculates, as potentially damaging to the corporation, are ignored while others are covered by this liability policy. She might recommend buying other types of insurance, such as fire or fraud, after first weighing the costs versus the benefits of each type of coverage.
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