We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Business

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What is a Management Risk?

Mary McMahon
By
Updated: May 17, 2024
Views: 2,620
Share

Management risk is a business risk associated with poor management practices. If the management of a company is not competent or is more interested in generating profits for itself than shareholders, it can make bad decisions that result in losses for the company and the shareholders. In calculating management risk, people consider the success of a company under competent management, in contrast with what might happen if company managers make poor or self-interested choices.

Managers of a company can make bad decisions for a number of reasons. Simple incompetence can be one cause of management risk if a company has managers who are not experienced or skilled enough to administer the company properly. Management can also be corrupt, inefficient, too conservative, or can underperform in other ways. Management prone to taking risks can also be a detriment to the company if the risks taken are not well considered in advance, and the company suffers losses as a result.

One of the most perilous forms of management risk is when company management stops acting in the best interests of the company and its shareholders. This is illegal, as company managers are required to think about the interests of the company when making decisions, but sometimes the prospect of easy money is too appealing to resist. This can create a so-called “Leprechaun leader” situation, which is when management moves funds to hidden accounts so the depth of the mismanagement is difficult to determine until managers in question have moved on and taken their "pot of gold" with them.

Companies want to find managers who will make sound choices when called upon to make management decisions, walking the line between managing with prudence and taking calculated risks. When evaluating management risk, companies can look at the history of the management's performance, the company's current position, and the experience and qualifications of individual members of management. This must be considered when making changes to management in order to avoid situations in which unreasonably high risk is created.

It can be difficult to predict what the outcome of a series of decisions could have been after the fact. This makes it hard to determine how much money companies lose as a result of poor management and bad decisions. Self-interested decisions may be banned under the law for people heading up public companies, but once those decisions are made, it can be challenging to determine how much should be awarded to people who lost money as a result of those decisions. This is especially difficult when people have moved on and successfully concealed their ill-gotten gains.

Share
WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Mary McMahon
By Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a WiseGeek researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Editors' Picks

Discussion Comments
Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a...

Learn more
Share
https://www.wisegeek.net/what-is-a-management-risk.htm
Copy this link
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.