Demystifying Risk Management

Risk Management

In today's interconnected world, the global landscape is constantly evolving and presenting new challenges. These challenges arise from various factors, including economic fluctuations, social dynamics, and regional conflicts. Understanding and navigating these dynamic landscapes is crucial for businesses and decision-makers. It allows them to anticipate and adapt to changes, mitigate risks, and seize opportunities. By analyzing the complex interplay of factors that shape our world, organizations can gain insights into how different regions and markets are interconnected, identify potential risks and opportunities, and develop strategies to effectively operate in diverse environments.

Implementing a robust risk management process is crucial for protecting your company's reputation and financial stability. Failing to address environmental and cybersecurity risks can have detrimental effects on your ESG score and customer loyalty. To successfully implement risk management, conducting thorough research, assessing potential damages, and developing mitigation and contingency plans are essential.

Defining Risks

Before we define risk management, we need to take a look at what constitutes a risk. There are many risks in business. Some people would say starting up a company is a risk, maybe even the biggest risk of all. But beyond that, risks typically come up when growing a business.

The International Organization for Standardization defines risks as anything that can have an “effect of uncertainty” on your business. This is fairly broad and can include hiring the wrong people, acquiring the wrong businesses, or moving into the wrong countries. Other risks are associated with the environment, your company’s reputation, or the materials you purchase. While you may share some risks with other businesses, you may also face some risks unique to your industry, location, or even your specific situation.

The first step in risk management is to list and define your geopolitical threats and risks. You should list all major and even some minor risks if you believe they could eventually have a large impact on your company. Then you want to define the scope of the risk and its potential outcomes. These outcomes may be fairly broad. For example, the risk of partnering with a vendor in another country could vary from “cultural miscommunications” to “the vendor engages in fraud, blackmail, bribery, and child labor.” With the former, the risk may be nothing more than a misunderstanding that can be discussed and cleared up. With the latter, however, you’re looking at facing potential sanctions and serious damage to your reputation.

What Does Risk Management Involve?

Now that you have a better understanding of what risks you face, let’s look at how you manage those risks. Risk management is the process of identifying risks, evaluating their danger to you, and prioritizing which risks you need to mitigate. For example, you may identify two risks with a potential merger: the business may have questionable financials and it may have been involved in several court cases. With some research from Infortal, you learn that the business was only tangentially involved in the court cases and wasn’t the primary defendant. You may determine that there’s not much risk there. The questionable financial issues, on the other hand, may be much more serious.

It's important to note here that the goal of risk management is not to eliminate every potential risk. That’s simply not possible. There will always be risks involved in your decisions. Instead of trying to accomplish the impossible, risk management focuses on mitigating serious risks and bringing to light those risks that are so severe they should be avoided. For example, if you do your due diligence and uncover that a potential C-suite candidate has embezzled from previous jobs, you may not be able to mitigate the reputation fallout from hiring them. Instead, you avoid that risk by passing on the candidate. On the other hand, acquiring a business that uses manufacturing processes that damage the environment is a risk that could be mitigated by immediately replacing those processes.

One of the things you’ll need to decide is what your risk limit is. This limit, sometimes referred to as risk appetite, is how much risk you’re willing to take to accomplish your goals. Businesses that try to avoid all risks typically grow slower, but they’re also typically safer. Those that take on a lot of risks may reach their milestones faster or reap large rewards, but they also could quickly fall if they gamble on a risk and lose. Most companies settle somewhere in the middle, taking small risks that they find are worth the reward.

Risks Come in Two Types

Risks can be broadly classified into two different categories. There are risks associated with an action, such as hiring a new executive or partnering with a new vendor. These risks are often somewhat limited in that you both know the risks you’re facing and what you need to do to mitigate or avoid them. While there are some cases where this isn’t true, such as finding out about a new executive’s criminal past years after hiring them, in most cases, you do have a rough idea of these risks. With a deep due diligence report from Infortal, you’ll be able to make an informed decision on the various risks you face.

The other type of risk can be categorized more as the risk of doing business. These are risks that all or nearly all businesses face, and they’re ongoing. For example, every business that collects data is at risk of a cyberattack. Even with the best cybersecurity, you could still be hacked and have to deal with the fallout. Another type of ongoing risk is that of a natural disaster. Injury is another risk you can attempt to mitigate through safety regulations but can’t completely avoid.

Fortunately, for these risks, you can often mitigate the financial damage with insurance. Insurance can be seen as one of the earliest forms of risk management in that it helps you mitigate the cost of accidents. That said, you will still want to have disaster recovery plans for these ongoing risks as well as look at how you can reduce the damage they can cause.

The Financial Dangers of Risks

Why is risk management so important? It all comes back to money. If you take risks without mitigating them or preparing for the fallout, the result can cost you millions. Your business may even have to declare bankruptcy. These risks don’t just come from hiring someone who might embezzle funds or commit other types of financial fraud. If you decide to partner with a vendor that operates in countries that the U.S. has sanctions against, you can end up fined. For example, 3M agreed to pay nearly $10 million dollars in September 2023 after being found to be in violation of U.S. sanctions on Iran. This fine came after it was found that a 3M subsidiary sold a product through a German reseller to a company under the control of Iran’s law enforcement. While 3M is large enough to absorb this fine, smaller companies wouldn’t have been.

While some risks directly impact your finances, others do so indirectly by negatively impacting your reputation. Partnering with a company that is actively damaging the environment to cheaply produce materials is going to negatively affect your ESG (environmental, social, and governance) score. Customers who are proponents of green production methods may boycott your company. You may also find that companies that focus on the environment no longer want to partner with you. Likewise, failing to take cybersecurity seriously can result in a data breach, which in turn may result in customers abandoning you for competitors that are more focused on protecting data.

Even when you do manage your risk correctly, you may still face some financial consequences as a result of your actions. However, the fallout is typically much less. In fact, the 3M sanctions violation speaks directly to this. The original amount of the fine was over $27 million dollars. However, because the company made use of a risk-based compliance program and voluntarily self-reported, the fine was greatly reduced.

How Do You Implement Risk Management?

To implement a risk management process, you first need to do some research. You need to be able to identify the risks you’re facing and know how to properly assess the damage they may cause. You also need to be familiar with risk mitigation and contingency plans.

For a business that isn’t familiar with risk management, this may seem overwhelming. With the right partner, however, it’s a very manageable task. Infortal can provide you with everything you need to begin risk management. We have the resources necessary to perform global risk forecasts and do deep due diligence into individuals, companies, countries, and regions of the world. With the information we gain from this due diligence, we’re able to brief our clients on the largest risks they face and what the potential outcomes of those risks are.

To learn more about risk management and how Infortal can help you identify, assess, and mitigate risks, reach out today. 


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CLE Accredited Courses

Infortal’s Continuing Legal Education (CLE) courses are designed to equip executives, attorneys and risk managers with strategic insights to navigate the complex landscape of geopolitical risk. We cover topics such as international sanctions, regulatory risks, corporate espionage, AML, global warfare, anti-terrorist financing and corruption.

We can help you make informed decisions and mitigate potential risks for your business.
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