In today’s corporate environment, risk management is considered crucial for the survival of the organisation due to increasing external threats such as stiff competition, political challenges, pandemic and the impact of global warming.

Therefore, it is vital to thoroughly delve on risk assessment to impart an understanding of the need to recognise the existence of problems. Hence, to respond to these problems by finding solutions for them.

Physical Environment

Our physical environment is a fundamental source of risks like earthquake and excessive rainfall, to name just two. The physical environment comprises all the different factors of nature, including trees, lakes, the ocean and land. It can be one of the main sources of risk, because a natural disaster can adversely impact the entire economy of a nation.

Social Environment

A person’s social environment includes his or her living and working conditions, income level, educational background and the community he or she is a part of. All these have a powerful effect on health. For example, big differences in social environments contribute to wide disparities in health. There are big gaps in life expectancy and disease rates between the rich and poor, the well and the poorly educated and manual workers and professionals.

Many different initiatives are under way to improve the social environment. Among the most important are schemes to create more and better jobs, improve the emotional health, safety and quality of working environments, ensure access to social benefits for people moving between countries, promote research and provide funding to develop the economies in the poorer parts of the world.

Political Environment

The political environment, as a source of risks includes national and international political factors which can affect its operations. These factors are called political as they principally originate from the actions of governments at a local or foreign level. This category also includes the way of thinking and set of beliefs which can influence the behaviour of governments and citizens opposing the company. These possibilities may not directly emanate from a government (example: nationalism).

For the risk management of an organisation, the analysis of this political environment is important. It principally consists of managing the risk that government actions do not influence international operations in a negative way. Thus, influencing the management in a positive way. For example a new prime minister might have dramatic effects on organisations, perhaps negatively by creating more challenges through new fiscal and monetary policy.

Legal Environment

A great deal of uncertainty and risk arises from the legal system. Over a period of time, standard conduct and the enforced punishment may evolve into a new legal. However, these changes may become condition precedents which may not be fully anticipated by the organisations or citizens of that country.

Legal systems vary from country to country. In the case of international trade you are likely to find that the legal system in the buyer’s country differs in many respects from that in the seller’s country.

Domestic laws govern marketing within a country, for example, the physical attributes of a product will be influenced by laws (designed to protect consumers) relating to the purity, safety or performance of the product. Domestic laws might also constrain marketers in the areas of product packaging, marking and labelling and contracts with agents. Most countries also have certain laws regulating advertising, for example Malaysia does not permit any cigarette or liquor advertising on television.

Operating Environment

The operating environment in risk identification describes the circumstances surrounding and potentially affecting something that is operating. For example, electronic or mechanical equipment may be affected by high temperatures, vibration, dust and other parameters which comprise the operating environment.

In addition, processes and procedures of an organisation generate risk and uncertainty. For example, the formal procedure for hiring and firing employees may generate legal liability.

Economic Environment

The economic factors which affect the working of the business are known as the economic environment. The source of risks from the economic environment includes the systems, policies and nature of an economy, trade cycles, economic resources, level of income, distribution of income and wealth, etc.

The economic environment is very dynamic and complex in nature. It does not remain the same. It keeps on changing from time to time; changes in an economy can be linked to changes in government policies and political situations.

Cognitive Environment

A risk manager’s ability to understand, see, measure and assess is far from perfect. An important source of risk for an organisation is the difference between perception and reality.

The cognitive environment depends on the judgement of the risk manager in order to obtain the information to assess risk. The judgement can be either true or false. Sometimes the perception of the risk manager might affect the real risk. He or she might overstate or understate certain types of risk depending on his or her perception.

In conclusion, unnecessary loss of wealth, be it property loss or human loss, predominates when a major catastrophe occurs. Property loss may to a certain extent be replaced but the loss of a loved one cannot be made good by any conceivable compensatory system. However, at times we see mistakes being repeated. Time and time again, we forget too quickly and history repeats itself.

A major catastrophe or disaster shakes us up, and often leaves us wondering how incidents that should not have happened had indeed taken place.

-- BERNAMA

Oswald Timothy Edward is Senior Lecturer (Risk Management) at the Faculty of Business & Management, UiTM Johor.