Management

Definitions of risk

The Oxford English Dictionary definition of risk is as follows: 'a chance or possibility of danger, loss, injury or other adverse consequences' and the definition of at risk is 'exposed to danger'. In this context, risk is used to signify negative consequences. However, taking a risk can also result in a positive outcome. A third possibility is that risk is related to uncertainty of outcome.

Take the example of owning a motorcar. For most people, owning a motorcar is an opportunity to become more mobile and gain the related benefits. However, there are uncertainties in owning a motorcar that are related to maintenance and repair costs. Finally, motor cars can be involved in accidents, so there are obvious negative outcomes that can occur.

Definitions of risk can be found from many sources and some key definitions are set out in Table 1.1. An alternative definition is also provided to illustrate the broad nature of risks that can affect organizations. The Institute of Risk Management (IRM) defines risk as the combination of the probability of an event and its consequence. Consequences can range from positive to negative. This is a widely applicable and practical definition that can be easily applied.

The international guide to risk-related definitions is ISO Guide 73 and it defines risk as 'effect of uncertainty on objectives'. This definition appears to assume a certain level of knowledge about risk management and it is not easy to apply to everyday life. The meaning and application of this definition will become clearer as the reader progresses through this book.

Guide 73 also notes that an effect may be positive, negative, or a deviation from the expected. These three types of events can be related to risks as opportunity, hazard or uncertainty, and this relates to the example of motorcar ownership outlined above. The guide notes that risk is often described by an event, a change in circumstances, a consequence, or a combination of these and how they may affect the achievement of objectives.

Table 1.1 Definitions of risk

The Institute of Internal Auditors (IIA) defines risk as the uncertainty of an event occurring that could have an impact on the achievement of objectives. The IIA adds that risk is measured in terms of consequences and likelihood. Different disciplines define the term risk in very different ways. The definition used by health and safety professionals is that risk is a combination of likelihood and magnitude, but this may not be sufficient for more general risk management purposes.

Risk in an organizational context is usually defined as anything that can impact the fulfilment of corporate objectives. However, corporate objectives are usually not fully stated by most organizations. Where the objectives have been established, they tend to be stated as internal, annual, change objectives. This is particularly true of the personal objectives set for members of staff in the organization, where objectives usually refer to change or developments, rather than the continuing or routine operations of the organization.

It is generally accepted that risk is best defined by concentrating on risks as events, as in the definition of risk provided in ISO 31000 and the definition provided by the Institute of Internal Auditors, as set out in Table 1.1. In order for a risk to materialize, an event must occur. Greater clarity is likely to be brought to the risk management process if the focus is on events. For example, consider what could disrupt a theatre performance.

The events that could cause disruption include a power cut, absence of a key actor, substantial transport failure or road closures that delay the arrival of the audience, as well as the illness of a significant number of staff. Having identified the events that could disrupt the performance, the management of the theatre needs to decide what to do to reduce the chances of one of these events causing the cancellation of a performance. This analysis by the management of the theatre is an example of risk management in practice.