Academic journal article Journal for East European Management Studies

Risk Management Practices from Risk Maturity Models Perspective

Academic journal article Journal for East European Management Studies

Risk Management Practices from Risk Maturity Models Perspective

Article excerpt

1. Introduction

Currently, risk management issues grow in importance within both financial and non-financial organisations. Undoubtedly, the prime reason for this trend are the rapid dynamics and constant hardening of the business environment. A well designed and successfully implemented risk management process is helpful in overcoming such obstacles and in providing organisations with a comparative advantage over those that do not manage risk.

Over the past decades, the approaches to risk management evolved to meet the growing requirements of use and effectiveness. According to Culp (2002:8-14), the discussion of risk management in a corporate finance context is still considered odd by some companies. In particular, till the late 90's companies demonstrated visible lack of understanding of risk management by distinguishing 'capital market' vs. 'insurance' perspective of risk management. Since then, the revolution of the concept of risk management is progressing, supported by the convergence of capital market and insurance market products and development of risk management procedure toward a strategic and value-creation oriented approach (Culp 2002:13-14). It seems highly important to promote and discuss ways in which non-financial companies may implement and then control their efforts in managing risk. One of the core problems is how to effectively assess the quality of a company's risk management performance.

The prime purpose of this paper is to provide a closer insight to the understanding, application and utility of Risk Maturity Models (Hillson 1997; Chapman 2006). Grounded on a strategic (holistic) approach to manage risk in organisations, Risk Maturity Models are presented as a valid tool, supporting risk management procedure by providing so called 'hallmarks' of advancement. In the research dimension, the paper aims at demonstrating practical application of exemplary Risk Maturity Models to the assessment of maturity of risk management practices of sampled Polish companies. The example includes a comparison with the maturity of practices recorded in global surveys (AON 2009; AON 2010).

In a theoretical dimension, the paper contributes to the existing knowledge and literature on risk management by filling the gap in the presentation and comparative study of the currently available Risk Maturity Models. In addition, the paper offers some extensions within the discussion over utility of Risk Maturity Models by providing a general approach to the construction of Risk Maturity Models and their linkage with cost-benefit trade-off. In a practical dimension, the paper contributes by providing managerial implications of the use of Risk Maturity Models. The included example offers a case study of the interpretation and classification of chosen characteristics of risk management practices (observed in surveys) in accordance with the levels of maturity included in exemplary Risk Maturity Models.

The paper is organised as follows. The second section offers theoretical insight to the problem by providing the conceptual analysis of the problem of risk management in a strategic dimension, which is central to the understanding of the idea and attributes taken into consideration in the assessment of risk management maturity. In section three Risk Maturity Models are discussed by examining their usage, construction and characteristics. As the problem of Risk Maturity Models is rarely the subject of deeper and complex academic studies, the applicative sources (in the form of sources provided by consultants) are also taken into account. The fourth section of the paper offers an example of the application of Risk Maturity Models (and maturity criteria considered within) in the assessment of risk management practices of Polish companies. The fifth section concludes the paper.

2. The strategic dimension of risk management practices - theoretical insights

Organisations manage risk as they expect that it will support the value creation process, mainly through the reduction of cash flow volatility, financial distress costs and the tax burden (Stulz 1996:8-24; Meulbroek 2002:56-70; Smithson/Simkins 2005:8-18). …

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