What Is Corporate Risk Management?

Corporate risk management is the practice by which a company or corporation identifies the risks involved in running its business and attempts to either eliminate them or mitigate their severity. The key to this process is making preparations for a disastrous event before it takes place so that operations will not be interrupted should the worst-case scenario occur. In terms of corporations that do business involving large amounts of money, corporate risk management concerns the efforts to take precautions against sudden calamities. This has become an increasingly important enterprise as regulatory bodies have cracked down on corporations that place themselves at high degrees of financial risk.

Risk management is an essential part of the business process for even the smallest companies. An unexpected occurrence that damages the core of a business is obviously something that no company wants to encounter, but simply pretending that these events won't happen is an invitation to disaster. As a result, corporations employ risk management specialists to ensure that potential problems that crop up don't do irreparable harm. Corporate risk management is an essential part of a successful company.

One of the ways that corporate risk management is achieved is through the use of risk modeling. Risk management experts can create models that identify all of the possible events that could damage a company, whether they are financial problems or legal issues. They can then assess the damage that would ensue should one of these events actually come to fruition. Knowing the damage involved with each potential problem allows the corporation to allocate resources to each problem area commensurate with the severity of the potential damage.

Companies that handle transactions involving large amounts of money are certainly in need of proper corporate risk management. This practice not only benefits the company, but society as a whole. When a large financial institution suffers, it often brings portions of the economy down with it. As a result, the finances of individuals can be adversely affected.

For these reasons, there have been many regulatory initiatives put into place to make sure that proper corporate risk management is enacted by the largest companies. Concerning financial institutions, these initiatives may impose restrictions on the amount of risk that financial institutions can take. In addition, such companies are often required to have sufficient reserves of capital if they plan to make huge transactions. Taking these steps can mitigate the damage caused by some unforeseen financial calamity, thereby limiting their effect on an economy as a whole.