ASSESSMENT Total Marks: 20
Risk Management (Short Course) Oxford Home Study College Page: 1
Risk Management (Short Course)
Answer the following questions:
1. What is the relationship between ‘Uncertainty’ and ‘Risk’? 5
The word uncertainty is often used together with the word risk.
Uncertainty refers to a doubtful thought. This is dependent on lack of
information about what will or will not occur in the future. Certainty is the
opposite, which means surety of a particular situation.
Where there is a risk (a situation where there is a possibility for loss),
uncertainty exists. It's possible for an individual to feel uncertain in a
situation which he or she imagines that there is a chance of loss. It is possible
for an individual to feel certain (sure) with regards to a certain risk when the
exposure to loss is not known.
2. Define ‘operational risk management’. 5
Operational risk is the risk of loss resulting from inadequate or failed internal
processes, people, and systems or from external events.
The FSA (2002) appropriately states that ultimately firms need to decide for
themselves what operational risk means to them and every company needs
to consider a more specific definition of operational risk that is appropriate to
the range and nature of its business activities and its operating environment.
Therefore, businesses need to adapt the operational risk definition in terms
of their own end product and the resources and processes they use to
produce that product.
3. Explain the factors on which the operational risk management depends 5
Developing a solid Operational Risk Management System will depend on a
number of issues such as:
A) The Risk Management System should not slow down decision making
processes or reduce business output
B) Risk managers who implement the operational risk program should not
be the managers of individual business units.
C) Risks should be managed at an appropriate level within the organization.
D) Developing a culture which rewards the exposure of risks when identified,
rather than encouraging staff to hide them.
4. Discuss in details the risks associated with people in a business? 5
A business must establish systems and controls to manage people risk
resulting from the actions of employees or the business itself. These systems
and controls must be in place for the duration of an employee’s tenure with
the organisation, beginning with recruitment and ending with the employee’s
resignation, retirement, or termination. On a positive note, people are an
important source of competitive advantage and can set one organisation
apart from another.
People risk may be described as a combination of employer behaviour which
affects employee efficiency, health and safety, loyalty, and the detrimental
impact of employee behaviour, which is anything from profit erosion to business
failure. In simple terms, there are three levels of severity of the impact that
people risk can have.
At the lowest level, people risk covers possible events which would, in the short
term, reduce profitability, share value or credit rating. At the second level, risk
events may have a negative impact on the organisation’s wealth or reputation in
the long term. The worst case scenario would be to bring about the eventual
collapse of a business due to conscious or unconscious actions of one or more
employees.
Types of People Risk:
Employees must be managed effectively as they have a high impact on business
profitability. The success of human resource management can be measured by
absenteeism rates (staff constraint), labour turnover (staff constraint), accident
rates (health and safety), productivity (management), quality of finished goods
(management), and customer satisfaction (management). Having said this,
people risks are actually broader than just efficient use of employees, and often
result from HR management practices like late payment of wages or salaries, not
adhering to statutory or regulatory requirements, staff constraints, dishonesty,
corporate culture which does not cultivate risk awareness, risk management, or
poor health and safety practices.
Staff limitations occur either when companies cannot fill critical positions
because of shortages in specific trades or professions (salary and other incentives
not drawing new candidates) or when staff retention is poor, causing business
disruption. Incompetence becomes a problem when employees lack the level of
skills and knowledge to do their jobs properly. The absence of professional
training and development would cause human errors. Fraudulent activities, such
as theft can be attributed to dishonesty within a company. Legal steps may be
taken against companies when employees discriminate against an individual in
terms of their age, sex, race, colour, religion, national origin, or disability, either
during the recruitment processes or selection of staff for promotion, transfer, or
bonuses.
The frequency with which employees miss work will directly impact an
organisation, and will incur direct costs and reduced productivity. A corporate
culture that does not actively promote risk awareness or encourages making
profit, with no regard to the methods used to make them, can result in negative
employee behaviour.
Health and Safety
Risk due to health and safety-related issues affect all businesses. These risks can
be extensive and the direct and indirect costs to businesses have been calculated
at about 3.8% of the market value of the 500 largest EU and US companies that
are at risk from these issues. Of this, 2.4% is internal risk (reviewed in
this unit) and 1.4% is risk to market value as a result of risk to the public and
customers.
The 2.4% risk to value is attributed to: Internal health risk at 0.7%, Internal
workforce safety risk of 0.5% and Historical health liabilities risk is an average of
1.2%.
