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How do you determine relevant risks?

Risk is the effect of an uncertain situation or event on objectives. Goals in a broad sense, including certain results or requirements, are the starting point. You want to achieve or achieve something, and look critically at what uncertainties have a negative (or positive) effect on it.

Working in a risk-driven manner in practice should not be guided by possible risks. Risk management according to Martin van Staveren can be viewed in at least two ways. “One of which leads to a persistent misunderstanding. In this interpretation, risk management means being driven by the possible risks. This would mean that as soon as a risk looms, a change of course is necessary because of that risk. So literally or figuratively a pull on the steering wheel to the right or left, or perhaps hard braking. A risk is usually seen as an uncertain event or situation in the near or further future, with unpleasant, undesirable consequences when it occurs. “

See also: Why risk management remains risky

However, the question remains whether a risk actually manifests itself. “By responding to every risk in a repulsive manner, in practice, everything will be initiated or prevented from activities, which is not necessary at all afterwards. Fortunately, not everything we consider to be a risk happens (the reverse is also the case). So this is a form of rigid and absurd risk management, which ultimately brings everything to a halt. Something that is explicitly not the intention of risk-based working, “says the core lecturer of Risk Management at the University of Twente.

Uncertain situation

The risk management expert also explains the other way of looking at risk management. He refers to controlling the possible risks, based on objectives. “This approach includes a risk definition that appears more and more in various guidelines and standards: risk is the effect of an uncertain situation or event on objectives. The goals in a broad sense, including certain results or requirements, are the starting point. “

In risk management, and in specific risk-based work, the so-called relevant risks must be clearly identified. Van Staveren: You want to achieve or achieve something, and look critically around which uncertainties have a negative (or positive) effect on it. These are the relevant risks, where you then decide whether or not to do something about it. Such a decision depends, among other things, on your own risk appetite, and on the possibilities and associated costs to limit such a risk. In this approach, the focus is on managing the risk.

No risk management

Van Staveren mentions a third option: no risk management at all. “You can of course consciously choose this, with a chance that you will still be driven by the risk. Or it just happens to you. Think for example of two poultry farmers and the Fipronil scandal. “

Chicken farmer A

“Chicken Farmer A receives an attractive offer from the innovative blood louse fighter Chicken Friend. These enthusiastic entrepreneurs claim that with their new product Fypro-rein (their self-invented code word for their pesticide based on Fipronil), chicken stables are kept bloodless for four times longer.

Chicken farmer A is healthy suspicious. She Google the name Fypro-rein, once calls a toxicologist, and comes to the conclusion that Fyrpo-rein is at least a rather unusual means. Chicken farmer A attaches great importance to the quality of its eggs and reputation. She therefore declines this attractive offer in a friendly and resolute manner. No experiments in the stable.

In terms of risk: Chicken Farmer A considers this product to be an unacceptable risk for egg quality. Given her goal to guarantee it, she decides not to use the new pesticide. From this goal, it therefore focuses primarily on food safety risk. Cost benefits from using the pesticide let them pass. “

Chicken farmer B

“Chicken farmer B receives exactly the same apparently so attractive offer from the innovative blood lice fighters. Chicken farmer B is rather economical and smells an opportunity to reduce his substantial operating costs. Every little bit helps.

According to the enthusiastic chicken friends, the chicken stables with their new agent Fypro-rein remain blood lice free four times longer: cash register! Chicken farmer B has the product sprayed. And indeed, after 2 months, 4 months and even after 6 months, no blood lice in sight! Kippenboer B also wants to continue to supply good quality eggs. Otherwise it will cost turnover, and therefore money. But it just doesn’t occur to him that those nice Chicken Friend folks are spraying with a food-safety-restricted agent. When that comes to light and the media shows up, a personal drama ensues. As a result, the culling of tens of thousands of chickens and the bankruptcy of his poultry farm.

Built in three generations, wiped out in three weeks. Chicken farmer B was therefore driven by a risk that had arisen, instead of steering itself. Because of a risk that as such was not seen by him at all. And could not reasonably be seen by him. After all, his focus was primarily on costs and turnover. That was what made the company big. “

Risk management: risk appetite and control

With the chicken farmers, Van Staveren characterizes the limits to risk-based work. “Risk management through risk-based work is expressly not intended to admit the control reflex for every risk that comes into view. So it is not the case that all trading is then driven by risks. However, it also does not mean that every relevant risk is always identified in time by everyone. Think of Kippenboer B. The aim is, however, to identify the relevant risks in time, based on clear goals. Then consciously choose whether or not to do something on the basis of purpose, risk appetite and control options. Don’t leave any misunderstanding about that now. “

The Finance Academy

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