Principles of risk management explained
25 July 2022
Following principles of risk management can help your organisation manage risk in the best possible way. This is important to ensure that your organisation is protected from the various threats that it may face. It’s also important because, if done well, risk management can create opportunities for your business.
Applicable for all types of organisations, the ISO 31000 standard provides useful guidelines for managing risk. One way it does this is with the ISO 31000 risk management principles. This blog outlines what the ISO 31000 risk management principles are and the benefits of following principles of risk management
Let’s get into it.
What are the principles of risk management?
The ISO 31000 risk management principles aim to help your organisation improve how it manages risk, so that you can create and protect value in your organisation. The principles also intend to make your risk management processes more efficient and effective.
Below, we explain the 8 principles of risk management that are outlined in the international standard.
- Integrated - Ensure that all of your organisation’s activities make risk management a focus. Integrate it throughout your organisation.
- Structured and comprehensive – To achieve consistent results, your approach to risk management needs to be well-organised and thorough. It can’t be haphazard or sloppy; this only leads to failures down the line.
- Customised – Every organisation is different. Make sure that your risk management framework and process is tailored to your organisation, the context in which operates, and its objectives.
- Inclusive – Where appropriate, involve stakeholders in the risk management process. Stakeholders are defined as either a person or organisation that can impact or be impacted by your decisions or activities. By considering their knowledge, views and perceptions, you can gain valuable insight to improve awareness and inform risk management.
- Dynamic – The risk landscape is constantly changing, as is your organisation. Don’t get stuck in a rut. Your organisation should be able to anticipate, identify, acknowledge and respond to all kinds of risks, whether they are new, changing, or no longer a concern. You must be able to do this quickly and appropriately.
- Best available information – A robust risk management process relies on past and present data, and anticipations for the future, as well as the limitations and uncertainties surrounding that information. What’s more, all information must be timely and accessible for stakeholders who need it.
- Human and cultural factors – Don’t forget about human behaviour and company culture, such as your organisation’s capabilities and goals, or stakeholder objectives. Factors like these can significantly impact risk management, so you must recognise this within your risk management activities.
- Continual improvement – In life, there is always more to learn. The same is true for risk management. You should always be discovering new things and, through experience, your approach to risk management should continually improve.
The benefits of applying the principles of risk management
When principles of risk management are not followed, risk is often approached in a disorganized manner that can have spiralling consequences. For example, if a manufacturer does not check the quality of materials from a supplier, they risk creating a sub-standard product. This could then lead to recalls, replacements, refunds, machine downtime, delay in re-supply, and ongoing costs to reputation. The list goes on.
By applying the principles of risk management to your organisation, it becomes easier to handle risks like the one just described. You can ensure that:
- Your approach to risk management is organised rather than chaotic – this can prevent failures and the higher costs associated with them, which protects the overall value of your organisation
- Your organisational risks are managed more easily – poorly managed risks can often spread further than the initial risk failure and make matters worse
- Your reputation is protected – a poor reputation can result in less new business and a loss of existing customers, which can be avoided when risk is managed more effectively
- You can identify potential hazards – once identified, you can take action to mitigate the damage should the risk occur, or remove the risk completely
- You can identify possible opportunities – implementing these opportunities can add value in your organisation
Now that you understand the principles of risk management that can improve how your organisation approaches risk, why not deepen your knowledge further? Learn how to implement these principles in a risk management framework and maximise your risk management processes.