- Enterprise risk management (ERM) is a comprehensive and structured approach to risk identification, assessment, response, and monitoring.
- Many organizations struggle with implementing ERM and identifying how to integrate it into their organization.
- ERM generally involves a dedicated team or function, and works best with input and participation from all levels of an organization.
Are you ready to implement your ERM program?
Business risks continue to increase, with the potential to impact your operations, financials, and reputation. Organizations across industries are seeing a variety of benefits from formalizing their risk management approach with ERM programs.
What is ERM?
Enterprise risk management (ERM) is a comprehensive and structured approach to risk identification, risk assessment, risk response, and risk monitoring. The ERM framework can vary widely, but typically involves people, rules, and tools. This means individuals with defined responsibilities use established, repeatable processes (rules), and the appropriate level of technology (tools) to help mitigate risk.
Many organizations struggle with implementing ERM and identifying how, and at what level, to integrate it into their organization. ERM is often led by a dedicated team or function, and works best with input and participation from all levels of the organization.
Yet managers often say they are already aware of the risks for their respective areas of the business. In these situations, what value does ERM provide, and how does it enable better perspectives and management of risks and risk data?
While there are many benefits to ERM, let’s focus on six of them.
1. Improved decision-making
ERM supports better structure, reporting, and analysis of risks. Standardized reports that track enterprise risks can improve the focus of directors and executives by providing data that enables better risk mitigation decisions. The variety of data (status of key risk indicators, mitigation strategies, new and emerging risks, etc.) helps leadership understand the most important risk areas. These reports can also help leaders develop a better understanding of risk appetite, risk thresholds, and risk tolerances.
One of the major values of ERM risk reporting is improved timeliness, conciseness, and flexibility of the risk data. It provides the information needed for improved decision-making capabilities within the executive and director levels, and in other layers of management.
By identifying and assessing risks, leaders at all levels can make informed decisions about how to allocate resources, manage risk exposure, prioritize initiatives, and capitalize on opportunities within the context of their business objectives and strategies.
2. Enhanced risk awareness
Organizations that have implemented ERM note that increasing the focus on risk at the senior levels results in more discussion of risk at all levels. The resulting cultural shift allows risk to be considered more openly and breaks down silos with respect to how risk is managed.
As risk discussions develop into a standard part of the overall strategic business processes, operational units often find that addressing risk in a more formal way helps manage their part of the organization as well. Communication and discussion of risk is recognized as not only a process to provide information to senior management, but a way to share risk information within and across operations of the company.
ERM develops leading indicators to help detect a potential risk event and provide an early warning. Key metrics and measurements of risk further improve the value of reporting and analysis and provide the ability to track potential changes in risk vulnerabilities or likelihood, potentially alerting organizations to changes in their risk profile.
Increased awareness can enable organizations to take a proactive approach to managing risks and reduce the impact and disruption of risks on their operations.
3. More efficient use of resources
In organizations without ERM, many individuals may be involved with managing and reporting risk across operational units. While developing an ERM program does not replace the need for day-to-day risk management, it can improve the framework and tools used to perform the critical risk management functions in a consistent manner.
ERM can help organizations identify areas where resources are being underutilized or overutilized. Eliminating redundant processes improves efficiency by allocating the right amount of resources to mitigating the risk.
ERM also fosters a more complete viewpoint on risk. Traditional risk practices focus on mitigation, acceptance, or avoidance. However, effective ERM processes give management a framework to evaluate risk as an opportunity to increase competitive positions and exploit certain market and operational conditions.
4. Increased stakeholder confidence
ERM involves a comprehensive and transparent process for identifying, assessing, and managing risks. This can help to build trust with stakeholders by providing them with a clear understanding of how the organization is managing risks and what steps are being taken to mitigate them.
Implementing a robust ERM framework demonstrates a commitment to stakeholders that the organization is focused on achieving its mission and that risk management is an integral part of that process. Increased stakeholder confidence can help organizations attract and retain customers, investors, and employees.
5. Improved business continuity
ERM helps organizations anticipate potential risks and be better equipped to operate in the event of a disruption. Identifying and addressing risks before they occur can reduce the likelihood of costly incidents and the resources required to respond to them.
By developing contingency plans, implementing risk mitigation strategies, enhancing communication and collaboration, and continuously monitoring and reviewing risks, organizations can be more resilient and better able to handle disruptions when they occur.
6. Effective coordination of regulatory and compliance matters
Bond rating agencies, financial statement auditors, and regulatory examiners use monitoring and reporting data from ERM programs. Since ERM data involves identifying and monitoring controls and mitigation efforts across the organization, this information can help reduce the effort and cost of such audits and reviews. It can also help organizations sidestep potential penalties, reduce risk exposure, and enhance their overall compliance posture.
How we can help
Through the benefits noted above, ERM can enable better cost management and risk visibility in your operations. It also enables better management of market, competitive, and economic conditions, and increases leverage and consolidation of disparate risk management functions.
CLA’s risk management professionals can help your organization implement a robust ERM framework, allowing you to manage risks effectively and better achieve your strategic objectives.