This post discusses enterprise risk management. In this post, you will understand the meaning, importance, practices, techniques, and implementation of enterprise risk management.

Businesses must manage their risks to ensure their continuity and profitability. Moreover, managing risks is an essential part of running a business. So, if risk management exists in these organisations, what is the point of adopting and implementing enterprise risk management (ERM)?

WHAT IS ENTERPRISE RISK MANAGEMENT?

Enterprise risk management (ERM) is a framework for managing organisational risk. Organisational risk is a broad term. It can encompass concerns ranging from ensuring employee safety, securing sensitive data, meeting statutory regulations, and stopping financial fraud. Risk can be internal, such as equipment malfunctions, or external, such as natural disasters. Risk varies from one organisation to another. The fundamental elements of ERM are the assessment of significant risks and the implementation of suitable risk responses.

Risk responses include:

• Acceptance or tolerance of risk.
• Avoidance or termination of risk.
• Risk transfer or sharing via insurance, a joint venture, and other arrangements.
• Reduction or mitigation of risk via internal control procedures or other risk prevention activities.

BENEFITS OF ENTERPRISE RISK MANAGEMENT

No risk management process can create a risk-free environment. Rather enterprise risk management enables management to operate more effectively in a business environment filled with fluctuating risks. There are three significant benefits of ERM: 

1. Improved business performance, 

2. Increased organisational effectiveness, and 

3. Better risk reporting.

Enterprise risk management helps a firm enhance its capacity in several ways, including:

1. Align risk appetite and strategy

2. Minimise operational surprises and losses

3. Enhance risk response decisions

4. Maximise resources

5. Identify and manage cross-enterprise risks

6. Link growth, risk, and return

7. Rationalise capital

8. Maximise opportunities

FRAMEWORK FOR UNDERSTANDING ENTERPRISE RISK MANAGEMENT

There are five frameworks for understanding ERM, including 

1. Corporate governance, 

2. Internal control, 

3. Implementation, 

4. Risk management process, and 

5. Sources of risk.

CORPORATE GOVERNANCE

Corporate governance must ensure that the board of directors and management have established the appropriate organisational processes and corporate controls to measure and manage risk across the business. Examination of recent developments in corporate governance reveals that they form catalysts for and contribute to the current pressures on ERM. It explains the expectations that shareholders have of boards of directors. 

It describes the approaches companies have adopted to risk management and the extent of disclosure of risk management practices. Corporate governance is essential to enterprise risk management because it provides top-down monitoring and control. It places responsibility on the board to ensure that appropriate systems and policies for risk management are in place. Good board practices and corporate governance are crucial for effective ERM.

INTERNAL CONTROL

Creating and maintaining a sound internal control system are required to safeguard shareholders’ investment and a business’s assets. Examining internal controls provides an understanding of what should be controlled and how. Internal controls are a subset of corporate governance, and risk management is a subset of internal controls. Risk management helps improve a firm’s operation, reporting, and compliance with laws and regulations. The aim is to accomplish this by identifying and assessing the business’s risks and responding to them to either remove or reduce them or, where appropriate, transfer them to a third party where it is economical.

RISK MANAGEMENT PROCESS

Risk management should articulate processes, inputs, outputs, constraints, and enablers. Exploring the mechanisms for implementing a risk management process is to break it down into its parts and examine what each part should contribute to the whole. This suggests that a risk management process involves analysis, identification, assessment, evaluation, and treatment of risks. While activities follow, a largely sequential pattern may be a highly iterative process. See the post on Risk Management Process.

ENTERPRISE RISK MANAGEMENT STRATEGY

An ERM strategy can provide answers to three basic business questions:

1. Should we do it (aligned with business strategy, risk appetite, culture, values, and ethics)?

2. Can we do it (people, processes, structure, and technology capabilities)?

3. Did we do it (assessment of expected results, continuous learning, and a robust system of checks and balances)?

ERM framework will help management and boards of directors answer the following eight critical business questions:

1. What are our business strategy and associated risks (coverage)?

2. How much risk are we willing to take (risk appetite)?

3. How do we govern risk-taking (culture, governance, and policies)?

4. How do we capture the information we need to manage these risks (risk data and infrastructure)?

5. How do we control the risks (i.e., maintain the risk environment)?

6. How do we know the size of the various risks (measurement and evaluation)?

7. What are we doing about these risks (response)?

8. What possible scenarios could hurt us, and how are various risks interrelated (stress testing)?

These eight questions aim to integrate critical competencies into an organisation’s ERM framework.

COMPONENTS OF ERM FRAMEWORK

Here are components of the ERM framework:

1. Business strategy and risk coverage

2. Risk appetite

3. Culture, governance and policies

4. Risk data and infrastructure

5. Control the environment

6. Measurement and evaluation

7. Risk response strategies for enterprise risk management

8. Scenario planning and stress testing

CORE CAPABILITIES OF A SUCCESSFUL ENTERPRISE RISK MANAGEMENT

Here are the five core capabilities of a sound ERM:

1. Risk insight and transparency

2. Risk appetite and strategy

3. Risk-related decisions and processes

4. Risk organisation and governance

5. Risk culture and performance transformation

TIPS FOR SUCCESSFUL IMPLEMENTATION OF ENTERPRISE RISK MANAGEMENT

ERM differs from traditional risk oversight approaches that focus on managing silos or distinct pockets of risks. ERM emphasises a top-down, holistic view of critical risks potentially affecting an organisation’s ability to achieve its objectives. Implementing ERM in an organisation should be manageable. It is not just about protecting the organisation’s tangible and financial assets; ERM focuses on enterprise-wide risks derailing the business strategy.

Here are six tips to help organisations implement ERM effectively:

1. Define what the organisation wants to achieve with ERM

2. Adequate planning

3. Set up risk response strategies

4. Set up risk monitoring

5. Adjust the risk management strategy

6. Create a risk-aware culture within the organisation

COMPONENTS OF ENTERPRISE RISK MANAGEMENT

When developing an ERM programme, it is essential to take a holistic approach to mitigate risks across the organisation. ERM consists of eight components. 

Here are the components of ERM:

1. Establish business objectives

2. Assess the risk

3. Respond to risk

4. Develop the internal environment

5. Identify events

6. Control activities

7. Information and communication

8. Monitoring activities

See the video on Enterprise Risk Management: https://youtu.be/u2194mLnG6g