Running a business involves taking chances, and well-run organizations anticipate the downside of those risks and develop contingencies to eliminate, mitigate or manage them. However, this was not the case for Silicon Valley Bank (SVB). The bank, heavily involved in venture investing in technology markets, reported assets of $212 billion at the end of 2022. By then, however, events were in motion that would end it in less than three months.
The Federal Reserve started the chain reaction by raising interest rates to historically high levels in 2022 to control inflation. That produced a sudden contraction in the technology sector and a seismic shock to SVB’s considerable bond investments, resulting in an asset sell-off and a $1.8 billion 1Q23 market-value loss in its investment portfolio. A run on the bank followed and SVB closed its doors in March for one reason: it did not see existential risk looming over it until too late.
After the event, Forbes said, “This is risk management 101 for banks!” Fortune echoed the verdict and said the collapse of one of the largest banks in the United States resulted from “a risk management nightmare.”
Risk to operations, profitability and regulatory compliance is pervasive throughout the economy, not just banking. Business sectors, including manufacturing, agriculture, retail and technology, manage risks and threats. Fluctuating markets, economic cycles, internal and external attacks on business processes, legal actions, reputational damage and natural disasters are all risks businesses face to one degree or another.
Graduates of the Bachelor of Business Administration (B.B.A.) in Management online program from Lamar University are well equipped to anticipate and weather risks in a handful of industries. To do that, though, they must understand how to identify risks.
How Do Businesses Identify Risk?
A business’ proactive risk management program begins with a comprehensive assessment of the risks that can damage operations, profits and strategy. Unfortunately, SVB’s failure to anticipate risks — the tech boom’s bust and skyrocketing interest rates — meant it could not develop plans to hedge or reduce their impact.
Other “preventable” business risks include:
- Physical risks, such as building fires, explosions and exposure to hazardous material spills, require employee education policies that direct workers’ response to events that can lead to bodily harm.
- Location risks for businesses on flood plains or in a tornado or hurricane alley pose significant threats to employee safety and business operations. The potential for rezoning or redevelopment around a business’ location is also a factor in risk management.
- Human risks ranging from substance abuse to embezzlement can affect productivity, safety, financial security and reputation.
- Technology risks can be anything from power failures to cyberthreats that can prove catastrophic to networks, data and finances. The Russia-sponsored Solar Winds hack cost the global technology provider an estimated $18 million to investigate and remediate. The total estimated cost of cybercrime in 2021 was $6.9 billion.
- Strategic risks can cut either way. Lending, for instance, is a risk that financial institutions must take but not before weighing the benefits of making a loan against the potential cost of default. One famous strategic blunder, the reformulation of the Coca-Cola drink to “New Coke,” cost the beverage company millions of dollars in research and development, advertising and lost sales because it did not adequately assess the risk that its customers would hate the drink’s new formula.
By identifying risks, professionals can design risk mitigation strategies that prevent them from happening and help organizations manage them if they do occur.
What Are Other Steps in the Risk Management Process?
Beyond identifying potential vulnerabilities, Prime Insurance Company recommends three additional elements of an effective risk-management policy:
- Assess: Calculate the probabilities of the identified risks and prioritize vulnerabilities based on worst-case scenario loss or damage.
- Evaluate: Review alternatives for responding to potential risks.
- Respond: Based on the assessments and evaluations, decide on strategies. Avoid the risk by canceling a planned strategic move; transferring it (or hedging the financial impact or damage); reducing it by implementing preventative or protective safeguards; or accepting it if the projected benefits outweigh projected costs.
“When learning how to understand risk management, success hinges on being proactive instead of reactive,” Prime Insurance Company says.
How Do Business Professionals Acquire Risk-Management Skills?
Understanding and anticipating various types of risk is critical for business professionals in any sector. One Corporate Finance Institute article notes, “For a business, assessment and management of risks is the best way to prepare for eventualities that may come in the way of progress and growth. When a business evaluates its plan for handling potential threats and then develops structures to address them, it improves its odds of becoming a successful entity.”
The curriculum for Lamar University’s B.B.A. in Management program helps graduates build the necessary skill sets to strengthen their risk management abilities. Graduates will gain the comprehensive business knowledge to move into management roles with an understanding of risk management.
Learn more about Lamar University’s online B.B.A. in Management program.
