The Tribune

As a governance, risk and compliance professional, I must emphasise the importance of establishing a solid risk management framework to protect against possible catastrophic corporate failures. The current business environment is constantly evolving, and new risks are emerging. Therefore, adopting a robust risk management strategy is essential to protecting businesses from future uncertainties.

The primary objective of a risk management framework is to identify, assess and mitigate risks. By identifying the potential risks, a company can create a proactive strategy to address them. This helps minimise risks and their possible impact on the company’s operations and financial stability.

One of the significant risks that businesses face is financial collapse. This can occur due to various reasons, such as economic downturns, natural disasters or plain mismanagement. A robust risk management framework can help companies mitigate these risks and prevent financial collapse.

This article will highlight three crucial points to keep in mind, and provide one recent example of where risk management was unsuccessful.

Identify, assess and mitigate risks

The primary objective of a risk management framework is to identify, assess and mitigate risks. By conducting a comprehensive risk assessment, a company can identify potential risks and evaluate their likelihood and impact on the business. This is crucial in creating a proactive strategy to address the risks, minimising their impact on the company’s operations and financial stability. The risk assessment process should involve all stakeholders in the company and be updated regularly to reflect any changes in the business environment.

Develop a risk mitigation strategy

Once risks are identified and assessed, developing a risk mitigation strategy is next. The risk mitigation strategy should include plans and processes to manage the identified risks, assign individual responsibilities and develop contingency plans to manage the risks effectively. Monitoring and reporting should also be conducted to ensure the mitigation strategies are working effectively.

Financial collapse

Financial collapse is a significant risk that businesses face due to various factors, such as economic downturns, natural disasters or mismanagement. A robust risk management framework can help companies mitigate these risks and prevent financial collapse. However, companies face other risks, such as operational, legal and reputational risks. Therefore, a comprehensive risk management framework should address all these risks. For example, operational risks can include system failures or employee errors. Legal risks can consist of lawsuits or regulatory fines. Finally, reputational risks can occur due to negative publicity or customer complaints.

News of Silicon Valley Bank’s (SVB) failure on March 10, 2023, is a clear example of how poor governance and risk management can lead to disastrous consequences. According to Fortune, SVB functioned without a chief risk officer for more than eight months. Despite being a well-known and established player in the banking industry, SVB failed to adequately address internal governance and risk issues, which may have contributed to its eventual collapse. This failure highlights the importance of effective risk management and regulatory compliance in the banking industry, and raises questions about SVB’s leadership and oversight practices.

In conclusion, a robust risk management framework is essential for businesses to mitigate possible collapse. Companies can protect their operations and financial stability by identifying, assessing and managing risks. With a robust risk management strategy in place, companies can not only survive but also thrive in the face of uncertainty.

• NB: About Derek Smith Jr

Derek Smith Jr. has been a governance, risk and compliance professional for more than 20 years. He has held positions at a TerraLex member law firm, a Wolfsburg Group member bank and a ‘big four’ accounting firm. Mr Smith is a certified anti-money laundering specialist (CAMS), and the assistant vice-president, compliance and money laundering reporting officer (MLRO) for CG Atlantic’s family of companies (member of Coralisle Group) for The Bahamas and Turks & Caicos.