Key Framework Components for Sound Risk Management

Developing a risk management framework is an important exercise for those who would like to understand and manage the uncertainties of achieving their business objectives in a structured manner. While it doesn’t need to be complicated, there are some key framework components that will enable a sound risk management framework.

What is a Risk Management Framework?

A risk management framework is a playbook for how risks are managed in your business.

A sound risk management plan will help you rest easier knowing that you have a structure in place for managing your risks. It can also help demonstrate to your stakeholders and potential investors that your business is a sensible one. To them, it demonstrates that you have thought about what could go wrong and have a plan in pace to mitigate potential pitfalls.

Your risk management approach does not have to be complicated or over-engineered. The size and complexity of your business should dictate the time you invest in creating structure around managing your risks. But irrespective of this, you should address the key components noted below to construct a sound risk management framework.

Key Framework Components

You, your business stakeholders and potential investors should understand your rules of risk management engagement for the following key components of your framework.

Business Strategy Setting

It all begins with your business strategy and the role risk management should play in that process. Define the point at which you will start discussing the risks and uncertainties surrounding your strategy. For example, this may occur during the formation, development, or implementation stage of your strategy or throughout the process. Furthermore, be clear about who should have a seat at the table when these discussions are being held.

Risk Culture

Determine your risk culture. Risk culture is the target behavior for risk management in your organization. Your culture is important because it sets the tone for how employees approach risk management challenges. For example, you may choose to encourage open and transparent discussions of risks throughout the organization. Alternatively, you may prefer discussion of risks only within closed doors with a select few. You should also determine how you will promote and embed the culture in your organization.

Governance Model

Clearly articulate roles and responsibilities for managing risks. Roles and responsibilities can be defined at the individual, group, and committee level. This is your governance model. It helps you define who are the risk takers and decision makers in your organization, for example. And moreover, the risk management expectations entailed with each role.

Read this article for more information on risk management governance: We Are All Risk Managers

Risk Taxonomy

Define your risk universe. You can do so by developing your risk taxonomy, which is the hierarchical categorization of your risk types. This overview helps ensure that your risks are comprehensively considered during the risk identification process. You will also use this as the basis for describing your risk appetite and measuring your risk profile.

Read this article for more information on creating your risk taxonomy: Understand Your Risk Landscape to Protect Your Business’ Future

Risk Appetite

Define and express your risk appetite. Your risk appetite is the level of risk you are willing to accept or tolerate in pursuit of your business objectives. The risks you are exposed to will be assessed against this measurement standard.

Read this article for more information on risk appetite setting: There Is No Right or Wrong Risk Appetite

Risk Profile Design

Determine the factors you consider when measuring your risk profile. Your risk profile should provide a point in time, aggregated view of your business’ risk management status.

Read this article for more information on risk profiles: Do You Know Your Risk Profile?

Documenting Your Framework Components

You should formally document the components of your risk management framework. This document should be the overarching risk management communication tool provided to your employees, stakeholders, and potential investors.

Provide Contextual Content

As this document is also intended for external audiences, such as regulators and investors, include additional contextual information for their understanding. Describe your organization at a high level and risk management infrastructure, for example.

Additionally, a description of other supporting documents is helpful, such your risk management policies and committee charters, if applicable.

Further, provide context around the need for continuous development and the review process for this document.

While there is no guarantee that your business will survive even with proper risk management, having a good risk management framework in place can prepare you for the ups and downs your business may encounter.

Read this article for more information on the benefits of a risk management framework: Your Business is Not Too Small to Manage its Risks