Evaluation of Risk

35

MODULE- I|

Chapter 3

Evaluation of Risk

3.1 Evaluation of Organization's Ability to Bear Risk

3.2 Stakeholder Involved in Business Risk
3.3 Role of Risk Manager and Risk Committee
3.4 Questions

3.1 EVALUATION OF ORGANIZATION'S ABILITY TO

BEAR RISK:
In each stage of thebusiness companies face
life cycle,
both internal and external risks that can have damaging
effects on operations. For new/start-up businesses and
established organizations, the ability to identify which risks
pose a threat to successful operations is a key component
of strategic business planning.
Business risks are identified using a numerous methods,
but each identifying strategy depends on a complete
analysis of specific business activities that could present
challenges to the company. Under most business models,

organizations face avoidable, strategic and external

threats

that can be managed through acceptance, transfer,

reduction or elimination.
ability to bear
For proper evaluation of organization's
Tisk following factors needs to be considered:
 36
Vipul's'M Risk Management (BFMI

Risk appetite: Totalexposed amount that an

Oganization wants to undertake on the basis of
risl.

return trade-offs for one or more desired and expected

outcomes.
Risk tolerance: Amount of uncertainty/risk an
organization is prepared accept in total
to or more
narrowly within a certain business unit,
a particular
nsk category, or for a specific project.
Ideally the risk
tolerance is lower of ability or willingness to take
risk.
Risk culture: Norms and traditions of
behaviour of
individuals and of
groups within an
regulate the way in organization that
which they identify,
discuss and act on understand,
the risk(s) the
and takes. organization faces
Risk target:
Desired level of risk
believes is ideal that the
tomeet its organization
Risk capacity: objectives.
Amount of risk an
actually bear.
organization can
Risk attitude:
standpoint of the Organization's or individuals
apparent view/
value that qualitative and
may be gained in quantitative
potential loss or losses. comparison tothe
related

3.2
STAKEHOLDER INVOLVED
A IN
stakeholder is BUSINESS RISK:
party that has
company, and can either an interest in
affect or be
a
[Link]
primary affected by the
are its stakeholders in a typical
investors,
modern theory employees and corporation
of the customers. However,
to idea goes the
include beyond this notion
additional original
government or trade stakeholders such as a comnmunity,
association.
 37
ofRisk
Evaluation

can be internal or external. Internal

Stakeholders
are people whose interest in a company comes
stakeholders
a direct relationship, such as through employmnent,
through
or investment. External stakeholders are those
ownership
who do not directly work company but
with a
are
people
in some way by the actions and outcomes of said
affected
are all
business.
Suppliers, creditors and public groups
considered external stakeholders.
3.2.1 Internal Stakeholder:

are a common type of internal stakeholder and

Investors

are greatly affected

by the outcome of a business. The most
investors are equity shareholders and bond
Commnon
holders If,for example, a venture capital/ private equity firm
5 million into a technology start-up in
decides to invest Rs.
and significant influernce, the firm
return for 10% equity
The return
becomes an internal stakeholder of the start-up.
of the company's investment
depends on the success, or

failure, of the start-up.

3.2.2 External Stakeholder:

stakeholders are a little difficult to identify, as
External
a direct the company.
relationship with
they do not have
a person or
Instead, an external stakeholder is normally
the business. For
organizationaffected by the operations of
limit of
goes over the allowable
example, when a company
is
pollution, the town in
which the company is located
because it is affected by
considered an external stakeholder

the increased pollution.

may also sometimes
Conversely, external stakeholders
tied
have a on a company but are not directly
direct effect
for example, is an external
to it. The government,
stakeholder. This is because
when it makes policy changes
 Vipul'sM Risk Management (BFM)
On
pollution, the
business with decision affects the operations of
any
increased levels of pollution.
Examples of a Company's Stakeholders.: (Source:
Wikipedia)

Stakeholders
Stakeholder's concerns
Government
taxation, VAT, legislation, employment,
truthful
reporting, legalities, externalities.
Employees
rates of pay, job security,
compensation,
respect, truthful communication.
Customers
value, quality, customer
care, ethical
products.
Suppliers
Providers of products and
services used in
the end product for the
customer, equitable
business opportunities.
Creditors
credit score, new
contracts, liquidity.
Community jobs, involvement,
environmental
protection, shares,
truthful communication.
Trade UnionsQuality
of work condition,
worker
protection, jobs
Owner(s)
profitability, durability,
market share,
market standing,
succession planning,
raising capital, growth,
social goals.
Investors return on investment,
income.
3.2.3 Responding to
Stakeholders Expectations:
Often there is more than one major
stakeholder in the
project. An increase in the number
of stakeholders adds
stress to the project and influences the project's complexity
level. The business or emotional investment of the
stakeholder in the proiect and the ability of the stakeholder
 of Risk 39
Evaluation

influence
the project outcomes or execution approach
to
the complexity of the project. In addition
will also influence

to the number of stakeholders and their level of investment,

.he degree which the project stakeholders
to agree or
influences the project's complexity.
disagree
Some commonlyknown techniques to meet stakeholder's
expectations and managing stakeholder's risk are as follow:
Analyse stakeholders: Conduct a stakeholder analysis,
or an assessment of a project's key participants, and
how the project will affect their problems and needs.
Identify their individual characteristics and interests.

Next step is to identify what motivates them, as well as

what provokes them. Later it is necessary to assign
roles and level of participation, and determine if there

are conflicts of interest among groups of stakeholders.

Assess influence: This stage involves measuring the

degree to which stakeholders can influence the project.
The more influential a stakeholder is, the more a
project manager will need their support. Knowing what

each needs or wants from the project will

stakeholder

enable the project manager to measure his or her level

of support.

Understand their expectations: This involves drilling

down stakeholders' specific expectations. So it is

to seek clarification when needed to be sure

necessary

they are completely understood.

Define "success": Every stakeholder may have a
aifferent idea of what project success looks like.

Discovering this at the end of the project is a formula

Hence it is critical to gather definitions up
1or failure.
to help ensure
front and include them in the objectives
 40
(BFM)
Vipul'gM Management
that all
Risk

stakeholders the fina

outcomes. will be siupportive
of

Keep
stakeholders
stage requires
inputs from involved:
seeking This
done by different stakeholders. This can be
measuring each stakeholder's capacity to
participate and honour
time
Keep constraints.
stakeholders informed:
sending regular It is critical to keep
information and updates to all
stakeholders. This
requires answering stakeholders
questions and emails
is emails [Link]
always appreciated communication
and may even protect the
company in case of
any bad news or
developments. negative
3.2.4 Risk and
stakeholders:
Different
stakeholder's have
risk: different concerns
and
(1)
Government: The main
to ensure concern of
that the government here is
and follows all company is fulfilling its tax
laws and liability
be addressed regulations. This
by the concern can
knowledge about tax company by having adequate
laws and a
team. qualified
compliance
(2)
Employees: This
category of
about stakeholders is
compensation, job concerned
This security and
concerned can be truthfulness.
policy addressed by having
with clear proper HR
to be employee policies. Also
updated about Also employees need
any major development in the
company.
(3)
Customers:
Customers expect qualty and
quality service
adequate
customer
care service. For this company
needs to
have a
Separate customer service department
and have
proper quality policy.
 of Risk
Evaluation V"Vrv 41

(4)Suppliers: Most important risk associated with

suppliers is
timely payment of goods or
services
providedby them. The company can
address this risk
by making timely payment
(neither too early nor too
late)to all suppliers and creditors.
In case of any delays
in payment creditors needs to be
intimated well in
advance.

(5) Community: Society expects job creation, environment

protection and social welfare policies.
Accordingly
corporates should fulfil its CSR (Corporate Social
without any hesitation or expectations.
Responsibilities)

(6) Trade unions: Unions are primarily

concerned about
safetyand security of
members. For this
its
management should periodically meet and discuss
issues related to workers and union. Further their
concerns should be addressed and resolved within
specific time frame.

(7) Owner and Investors: This category of stakeholders

looks to maximize their wealth. Corporates should

always work with an intention of increasing their profits
and ROI. Also adhering to regulatory requirementsis
equally important along with profitability for long term
growth of the company.

3.3 ROLE OF RISK MANAGER AND RISK

COMMITTEE:
3.3.1 Risk manager (Chief Risk Officer):
Risk management involves participation of everyone in
ne organization. However the most critical role is of Chief

Risk Officer (CRO). It is responsibility of CRO to collect

uecessary information from Risk team, financial controllers

and team. Also CRO is responsible for
operations
 RISk
Management (BFM)

organizing, developing and implementing the process of

identifying, measuring and controlling credit risk, market
risk, operational risk and liquidity risk
in the company.
Than periodically rcports are prepared based On
information received by CRO and presented to MD or CEO
of the [Link] reports may be presented in board

meetings and all critical aspects are discussed. Further

based on feedback received from the board necessary
corrective actions are initiated and shortages if any are
removed.

the CEO/MD may pass on necessary details

1f required
to credit tean or distressed loan bureau for better debt

recovery. Also the details if required are shared with

operations and compliance team so that appropriate risk
process can be set which are in compliance with applicable
regulations.

It is responsibility of CRO
to ensure that all required
actions are talken and suitably presented to the
board the
next time they meet.
3.3.2 Risk Committee:

The purpose of the risk management committee

of the
Board of Directors (the
"Board'") of any company is
to
assist the Board in
fulfilling its corporate
governance
oversight responsibilities with regard to the
identification, and elimination of
evaluation
strategic,
operational, and external environment
nt risks. The
Committeehas overall
responsibility for monitoring
approving the risk and
management agenda and
practices of the related
Company.
The Risk Committee
(the
independent committee of "Committee") is an
the Board of
has, as its only Directors that
and exclusive function,
responsibiiy
 ofRisk
43
Aahuation
risk management policies
the of the
operations and
for Corporation's
oversight of the
worldwide operation of
global risk
the Corporation's management framework.
Committee assist the Board of Directors
The in fulfilling
its responsibilities
with regard to the risk
and the risk appetite/
of the Corporation
desire managenent and
framework and the
compliance governance structure
Risk
appetite is defined
it.
that supports the level
as
type of riska
firm is able and
and willing to take in
its
and business activities, given its
exposures business
and responsibilities to stakeholders.
objectives

The Committee have the resources and authority

ffcient to discharge its responsibilities, including sole
outhority to retain and dismiss the engagement
of
consultants or independent counsel to the Committee
as it may believe suitable or helpful in carrying out its
responsibilities, and to establish the fees and other
terms for the continuation of consultants and counsel.

3.4 QUESTIONS:
(1) Multiple Choice Questions (MCQs):
(a) Who is a party that has an interest in a company?
() Stakeholder (ii) Government (iii) Employees (iv) Customers

are primarily concerned about safety and

(b) security

of its members.

()Unions (ii) Government (ii) Employees (iv) Customers

their wealth?
(9) What category of stakeholders looks to maximize
(iil) Employees ((v) Owner and
(0) Unions (ii) Government
Investors
from Risk
to collect necessary information

)
19 Who is responsible
team?
of Directors
CFO(i) CRO (i)CTO (iv) Board
44 VVy Vipul'sM Risk
Management (BFM)

(e) Which category of stakeholders is

is concerned about
compensation, job security and truthfulness?
()Govemment(li) Union (lii)Employees (iv) Investors
[Ans.: (a) Stakeholder; (b) Unions; (c) Owner and investore:
(d)CRO; (e) Employees]
(2) Match the columns:

'A' 'B'
(a) Government (0) rates of pay
(b) Employees (i) taxation
(c) Customers
(ii) jobs
(d) Suppliers
(iv) value
(e) Creditors
(v) equitable business
() Community (vi) credit score
opportunities

(Ans.: (a -
i); (b-i); (c -
iv),: (d-v): (e-vi); (f-i)]
(3) Write a note on
"Evaluation of
(4) Discuss Organization's abilityto
about Stakeholders bear Risk.
involved in Business
(5) Explain Role of Risk Risk.
Manager and Risk
(6) Write a short note Committee.
on Chief Risk
(7) Discuss on
the
Officer. (May 18)
(April 19) stakeholders who are involved
in
(8) Explain Business Risk.
Risk and
Concerns of different
(9) Write short
notes on: stakeholders. (April 23)
(a)
Respondingto Stakeholder
(Oct. 19) expectations in risk
(b) Risk management.
Committee. (Oct. 19)
(c) Chief Risk
Oficer. (April 23)