Introductory post about Enterprise Risk Management
In today's complex and uncertain business environment, organizations need a robust capability for managing risks holistically across the enterprise. This is where Enterprise Risk Management (ERM) comes in as a structured framework for identifying, assessing, prioritizing, and responding to the full spectrum of risks facing an organization.
ERM takes a big-picture view of risk, coordinating previously siloed risk management activities. Rather than only focusing on known financial and hazard risks, it considers emerging strategic, operational, and reputational risks organization-wide. This enables executive management and the board to determine desired risk exposure levels and make strategic decisions factoring in risk-reward trade-offs.
Mature ERM programs are built on four core elements:
Risk Governance - Defined oversight responsibilities at the board and management levels ensures accountability for risk decisions. A Chief Risk Officer and risk committee structure foster cross-functional involvement.
Risk Culture - Through standards, policies, training, and incentives, a risk-aware culture helps employees at all levels understand risks and make appropriate decisions daily.
Risk Appetite - The organization’s risk appetite and tolerances are defined, determining how much risk is acceptable in key areas. This guides risk-taking aligned to strategy.
Risk Capabilities - Skilled resources, processes and infrastructure for risk identification, assessment, reporting and monitoring enable embedding ERM into business activities.
Implementing ERM involves five key phases:
Establish Context - Internal and external business contexts are evaluated to identify objectives, stakeholders and risk categories relevant to the organization.
Risk Identification - Potential events that could impact objectives are identified through workshops, process analysis, incident reports, and audits.
Risk Analysis - The likelihood and potential impact of each key risk are analyzed relative to risk tolerances.
Risk Evaluation - Risks are evaluated against risk appetite and tolerance to determine priority responses based on overall exposure.
Risk Treatment - Appropriate options like avoidance, mitigation, transfer or acceptance are implemented to align residual risk with desired appetite levels.
Ongoing activities include monitoring emerging risks, reviewing risk measures, updating profiles, and reporting to executives and the board.
The benefits of ERM include supporting strategic decision-making, enhancing controls and compliance, optimizing capital deployment, increasing resilience, and creating competitive advantage. ERM further fosters a proactive vs. reactive stance to risks.
While demanding to implement, ERM provides vital insights to help organizations anticipate and respond to the myriad risks that can impact objectives. Embedded effectively through a risk-aware culture, ERM enables managing uncertainty and change as an integral part of business activities. This is why implementing robust enterprise-wide risk management has become both a priority and a hallmark of leading organizations worldwide.
DecideWright is a UK-based consultancy that delivers solutions in the areas of Strategy Execution and Enterprise Performance Management, Enterprise and Operational Risk Management, Operational Resilience including DORA and Measurement & Metrics, including KPIs & OKRs.
Contact us to see if we are the right firm for your project.