Is Risk Management Really Worth It? The Hidden Dangers of Over-Regulation
"Uncover the surprising downsides of mandated risk management and why a flexible approach might be better for your business."
In recent decades, policymakers worldwide have increasingly turned to risk management as a tool for preventing corporate scandals and financial crises. This has led to a growing trend of embedding risk management into law, mandating specific practices, and imposing disclosure obligations.
But is this increasing juridification of risk management (RMJ) truly effective? While the intention is noble – to safeguard businesses and the wider economy – a closer look reveals a number of potential drawbacks. Over-regulation may lead to standardization, stifled innovation, and even a false sense of security, potentially undermining the very goals it seeks to achieve.
This article examines the downsides of mandated risk management, particularly for listed companies. By understanding these potential pitfalls, businesses and policymakers can make more informed decisions about how to approach risk management in a way that fosters both stability and innovation.
The Perils of Over-Regulating Risk: Standardization, Innovation, and False Security
The trend towards mandating risk management has been particularly strong in the financial services sector but has also extended to listed companies. European legal scholars have largely supported this increased role of law, calling for improvements rather than questioning the fundamental principle. However, a closer examination reveals several potential problems.
- Standardization: When risk management procedures become legally relevant, companies may feel pressured to adopt prevailing “best practices” to ensure verifiability and compliance.
- Stifled Innovation: Firms may be less willing to deviate from established norms, even if customized approaches would be more effective.
- False Sense of Security: Over-reliance on standardized risk management can create a false sense of security, leading to a neglect of crucial factors that may not be easily quantifiable.
A Call for Balanced and Flexible Risk Management
While risk management is undoubtedly a valuable tool for businesses, over-regulating it can have unintended consequences. By understanding the potential pitfalls of standardization, stifled innovation, and misplaced security, businesses and policymakers can work together to create a more balanced and flexible approach to risk management – one that fosters both stability and long-term growth.