FACTORS AFFECTING RISK STRATEGY

Discuss what factors are likely to affect a board’s choice of risk strategy in a company listed on stock exchange.

Factors Affecting Risk Strategy

1. Risk Attitude

• The risk attitude of the directors will be a big factor in how much risk is taken. If the directors’ personalities are those of natural risk-takers, then they will tend to take a lot of risk. Obviously if they are relatively risk-averse, then they will not take much risk.

• The directors are agents of the shareholders, so they will need to consider the risk attitude of the shareholders when deciding on a risk strategy. Of course, if the shareholders are risk-averse, they will probably have appointed a board that is also risk-averse, so the attitude of directors may already be matched to that of the shareholders.

• The risk attitude of other key stakeholders, such as employees, customers, industry regulators etc. will also need to be considered, depending on the type of industry that the company is in.

2. Risk Capacity

Risk taking requires resources such as time, staff, and money. Therefore a company must understand the resources that it has at its disposal when forming its risk strategy, or it will not be able to deliver it.

3. Position of Company

The position of the company, and its future strategy and objectives, will also affect risk strategy. A company that is currently in trouble may have to take higher risks in an attempt to survive. In a similar way, companies looking for rapid growth are unlikely to achieve it without taking significant risks.