In any business, there are bound to be risks, and it falls on the CEO and the business managers to foresee these risks and take the necessary precautions to defend against them. This is where risk management comes in. A risk management strategy outlines a company's approach to identifying, assessing, and dealing with risk. Such a strategy is vital in building a resilient and adaptable company.
Common Types of Risks in Business
To effectively guard against risk, chief executives need to know that it can come in many forms. The most common types of business risks are as follows:
1. Operational Risk: Operational risks are things that threaten to halt business operations. This can be internal, like system failures or the unexpected loss of a key employee. But it could also be external, like a natural disaster or severe property damage.
2. Financial Risk: There are many different aspects in a company's financial dealings — cash flow, market fluctuations, or any bank fees stemming from business loans. As such, each of these facets invites a certain level of risk. Should anything go wrong with even one of these, then a company might have to deal with a growing financial problem.
3. Compliance Risk: The legal side of business involves compliance with business laws. In that light, compliance risk is present when the workforce is unaware of the regulations they must adhere. For instance, there are data protection laws that apply to businesses and failing to follow these could lead to legal repercussions.
4. Security Risk: Before the digital age, this would primarily apply to the physical security of offices and other workplaces. However, security risks now mostly consist of cyber threats. With the rapid digitalization of the business sector, cybercriminals have more opportunities to enact cyber attacks. As a result, more and more professionals are looking to start their careers in cybersecurity, what with the growing demand for cloud architects and cybersecurity engineers.
5. Reputational Risk: Reputational risks are affected by how the public views the company. Even one unhappy customer can increase this type of risk, and social media outlets will further exacerbate it. It only takes a single negative review to discourage potential clients from interacting with your business.
The presence of these risks is, to put it simply, bad for business. Any of the above uncertainties have the potential to disrupt the business’s operations, something that no organization wants. It is difficult to plan around unpredictable circumstances, not to mention a costly affair. Risk management, then, is a way to reduce and plan for uncertainty, which in turn keeps losses low, employees happy, and the business’s reputation protected.
The Role of CEOs in Risk Management
Because of their influence on the company, the CEO carries the heaviest weight in terms of risk management. It’s their job to ensure the growth of their company and provide value to both shareholders and employees. CEOs must be strategic about risk management. It's a tall order, considering that chief executives already have plenty of other duties, like overseeing operations and being the face of the company. However, it's a necessary step in building the company's resilience.
Luckily, most CEOs are well equipped to spearhead these efforts. Their educational background has likely equipped them with the theoretical knowledge needed to navigate the complexities of risk management. After all, individuals trained for a career in business administration are experienced business analysts, capable of researching vital aspects of corporate strategy and policy. This allows them to extrapolate accurate data in their risk assessment, and then use it to make informed decisions regarding strategy. Moreover, their on-the-job experience should give them enough insight into what types of risks the company is most vulnerable to.
Undoubtedly, CEOs already have plenty of work on their plates. Despite this, it is also part of their job to know when to delegate certain jobs to others. One example of this is found in data management needs within the company. The efficient collection and storage of data are crucial in risk management, as it allows the company to identify and mitigate potential threats, thus reducing the risk of losses or lawsuits. The processes involved in data science are complex and tedious. Thus, it is well worth enlisting the help of a data analyst. According to the U.S. Bureau of Labor Statistics, data science is expected to grow by 33% come 2026, providing over 11.5 million new jobs for data professionals. And it's easy to see why. These professionals are adept at working with large sets of data and inferring valuable insights from them. Additionally, utilizing important data isn’t limited to risk management. Data-driven insights can also benefit all the other facets of a business — marketing techniques, employee productivity, and customer engagement. Clearly, in the modern business world, efficient data management is a necessity. This is especially the case now in the digital age. Cybercriminals could very easily hack into a company's database and steal sensitive info, so CEOs need to work towards bridging the data gap and minimizing their risks.
Recruiting and retaining the right talent, investing in the right tools and resources to manage risk such as cybersecurity teams, and digitizing operations are great places to start — but it’s more than that. CEOs also have to cultivate a culture of risk management, first by empowering their employees to identify and address these problems firsthand. Prepare your workforce with opportunities to participate in the decision-making process, as well as adequate training. By being proactive in crafting risk management strategies, CEOs make their companies more resilient and more flexible to change.
Need some help? Wendt Partners provides a variety of business growth consulting services, including those focused on strategy. So, if you need some guidance on how to craft your risk management strategy, schedule a call with us now!