Management Risk

DEFINITION of 'Management Risk'

The risks associated with ineffective, destructive or underperforming management, which hurts shareholders and the company or fund being managed. This term refers to the risk of the situation in which the company and shareholders would have been better off without the choices made by management.

BREAKING DOWN 'Management Risk'

Management risk refers to the chance that company managers will put their own interests ahead of the interest of the company and shareholders. An example of this is the recent scandals with Enron, Worldcom and other large companies, whose managers acted in a manner that eventually bankrupted the companies and destroyed shareholder wealth. Management risk also applies to investment managers, whose decisions and actions may divert from the investors' wishes or reduce the value of an investment portfolio.