Written By: Sonjai Kumar
This article discusses the role of enterprise risk management in creating and protecting the shareholder’s value in an organization as opposed to the traditional view of protecting the down side risk. The objective of risk management is not to eliminate risk but to identify, quantify and manage the risk in line with shareholder’s value creation expectation.
Why there is a need of risk management? Because future is unknown and uncertain, the outcome could be good or bad but not known and shareholder’s money is at stake. The risk as defined COSO is “Events can have negative impact, positive impact or both. Events with negative impact are a risk which can prevent value creation or erode existing value. Events with positive impact may offset negative impact or represent opportunity. Opportunity is possibilities that an event will occur and positively affect the achievement of the objective supporting value creation or preservation. ISO 31000 define risk as “The effect of uncertainty on the objective” the uncertainty may have upside or downside.
Both the risk definition conveys the same message of unknown future and uncertain outcome. In the context of business, shareholders put the money to make more money when future is not know , there is a risk of loss of entire capital however there is a good chance of making money coming from the opportunity stored in future represented by probability. Probability is the most significant development of history laying the foundation of risk management centuries ago.
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