Edward Chao


What's preventable risks and how to effectively manage?


What's preventable risks and how to effectively manage?

According to my past experiences,the first step in creating an effective risk-management system is to understand the qualitative distinctions among the types of risks that organizations face. Our field research shows that risks fall into one of three categories. Risk events from any category can be fatal to a company’s strategy and even to its survival.

Type I: Preventable risks.

These are what I call "internal risks" which is arising from within the organization, that are controllable and ought to be eliminated or avoided. Examples are the risks from employees’ and managers’ unauthorized, illegal, unethical, incorrect, or inappropriate actions and the risks from breakdowns in routine operational processes. 

To be sure, companies should have a zone of tolerance for defects or errors that would not cause severe damage to the enterprise and for which achieving complete avoidance would be too costly. But in general, companies should seek to eliminate these risks since they get no strategic benefits from taking them on. A rogue trader or an employee bribing a local official may produce some short-term profits for the firm, but over time such actions will diminish the company’s value.
This risk type is best managed through active prevention: monitoring operational processes and guiding people’s behaviors and decisions toward desired norms. Since considerable literature already exists on the rules-based compliance approach, we refer interested readers to the sidebar “Identifying and Managing Preventable Risks” had been popular discussed and apparently best practiced in most industry.


Dr. Chao
5-Feb.-2015