Question

Since you can never predict every threat, risk management is a waste of time. Discuss

Answer 1

Even though predicting threats or risk is not possible, corporations face risks everyday and managing these risks are important for the survival of these companies. Post the financial crisis of 2007-09, it becomes even more important for firms to have a robust risk management department or otherwise meet the fate of the likes of Lehman Brothers.

We first need to understand what is risk. Risk can be defined as the volatility of unexpected outcomes, which can represent the value of assets, equity or earnings. Firms are exposed to various kinds of business and financial risks.
Business risks arise when companies make business decisions like investment decisions, marketing strategies, company's board structure etc. Business risk may also include the business environment in which companies operate, for example competition, broad macroeconomic risks etc.
Financial risks relate to possible losses that can occur due to unexpected activities in the financial markets. For example, unexpected interest rate changes, default on financial obligations etc.

Companies now increasingly focus more on identifying risks and managing them even before they start business. Risk management, thus, is the process to identify, evaluate risk and formulate plans for its avoidance or mitigation. Risk management is important as it helps organizations to save money and protect their future. A robust risk management plan will help the organization to avoid the risk, or minimize its impact should it occur. Risk management also helps in deciding the amount of capital required for writing new businesses. It is also a fundamental factor for pricing an organization's products. High risk products should be associated with higher price.