Risk-taking and risk management

March 2, 2020
by Noriyuki Morimoto

The issues of corporate management can be summarized into the follows: Has the company clarified the risks it consciously takes to achieve business objectives? Does that fundamental risk-taking generate an appropriate level of profit against the required capital? Are the risks that accompany the fundamental risk-taking properly controlled? And is governance established to prevent deviations from the fundamental risk-taking?

There is no way to change the basic structure of a business in general: a business has an objective, conscious risk-taking to achieve that objective, and risk management to control the way of risk-taking. It is important to note here that the risks taken in direct relation to the business objective are the subject of management itself, and on a different plane from the subject of regular risk management. Risk management can be perceived as a supporting function of business management that aims to control various risks that accompany the risk-taking directly related to the business objective.

For instance, in a manufacturing business, the intrinsic risk of what the company produces is clearly not something to control: the risk is taken actively, consciously and intentionally. On the other hand, various risks associated with the production process and raw materials are not actively taken, but are passively accepted or unintentionally incurred as aspects that have to be controlled.

As intrinsic risks are not the subject of risk management, there is nothing the company can do once they materialize. For example, there used to be a product called the typewriter, for which social demand was eliminated through drastic changes in the technological environment. Once the inherent risks of typewriters materialized in this way, manufacturers had nothing to do but shut down the production of typewriters.

Of course, companies responded to this fundamental business risk by venturing into the production of computers and further shifting operations into the information service industry. These are active, conscious, and intentional responses that are by no means positioned within the supporting role of risk management: they are nothing less than high-level strategic management decisions.

Nevertheless, there are countless cases of confusion between risk-taking and risk management.


[ Category /Risk Appetite Framework]

Noriyuki Morimoto
Noriyuki Morimoto

Chief Executive Officer, HC Asset Management Co.,Ltd. Noriyuki Morimoto founded HC Asset Management in November 2002. As a pioneer investment consultant in Japan, he established the investment consulting business of Watson Wyatt K.K. (now Willis Towers Watson) in 1990.