Why is Enterprise Risk Management Framework an Imperative?
Building on the concept of resiliency, businesses are looking into the enterprise risk management (ERM) framework better fitting in today’s context as we prepare for further volatility and complexity ahead.
ERM is the middle ground between a company’s ultimate goal and its outcome. It serves as the first line of defence from all internal and external threats looming to jeopardize a business’ ability to meet its objectives. Focusing on this approach, let’s delve down to this approach’s key points and find out why it’s crucial to capitalize on developing a good ERM strategy.
Components of Enterprise Risk Management
There are 5 interrelated main components in ERM, and in each component lies several principles that support the integrated approach the management implements.
To guide you better in establishing your ERM game plan, take note of the below ideas and principles:
- Government and Culture
Governance is all about setting the effective overall tone in the organization and embedding culture’s role in supporting ERM.
- Strategy and Objective-Setting
This pillar elaborates the importance of ERM, strategy, and objective-setting in accentuating ERM as a vital part of a strategic plan.
Risks that threaten to impede the fulfilment of business objectives and strategy are to be identified, assessed, responded upon, then reported to the stakeholders and the management.
- Review and Revision
The evaluation of performance clarifies how the ERM is functioning. Furthermore, it reveals any kind of improvement needed in the process.
- Information, Communication, and Reporting
Communication of risk and strategy information must be continuous for an ERM to have enduring functionality.
For further studies about the ERM Framework, you can check this document: 2017 COSO ERM Integrating with Strategy and Performance Executive Summary.
How to make an ERM plan
Undoubtedly, the biggest part of the risk management context is the implementation. This part raises the question ‘how?’, then translated into different action points internally. Now that you have an idea of the ERM framework, it’s time to come up with an ERM plan that would complement the current state of your business.
Here’s a guide on how to implement enterprise risk management into your operations.
- Define your objectives.
This sets the direction of the course. If not properly set, chances are you’ll be aimlessly pursuing an endless track. If you know what your goals are, you are more inclined to know where you’re going and what kinds of risks exist in these realms.
- Establish communication.
Communication is what bridges the organization closely. It is the cohesive element of the plan. When the management communicates with its people the risk mitigation strategies, they [people] understand the role they play in the business’ structure and what they contribute in support of your overall goal.
- Identify the risks.
What are the imminent risks to your strategies and objectives? How are they going to impede your overall game plan? There are different ways to identify these risks and uncover the activities that expose business units to uncertainty.
- Assess your internal controls.
After identifying the risks, examine your internal controls. Are your operations efficient enough to achieve your objectives?
- Mitigation of risks.
Consider the optimal risk response in resolving the forthcoming and possible threats. What areas are potentially open to generating a big loss? What department is the most vulnerable to risks?
- Risk monitoring and reporting.
ERM is a dynamic and continuous process that demands company-wide participation. As such, stakeholders and the management should be periodically updated on the key risks reported and being monitored.
What are the benefits of enterprise risk management?
At its facade, ERM can be perplexing. With all the core principles surrounding it, you may think that you got your work cut out for you. But let’s see the upside of implementing its framework to your organization.
- Corporate resilience. With a proactive strategy in place, your business is more likely to seize more opportunities with an ideal risk-return ratio.
- Clearer overall vision. Data-driven decisions are grounded into risk-related insights that shed light on dormant threats.
- Maximum operational competence. ERM promotes maximization of resources, hence raising chances of raking in more revenue while achieving operational efficiency.
- Regulatory compliance. ERM is also an advocate of compliance. It makes sure that your company adheres even to the most stringent laws.
- Breaking down silos. ERM is an overarching strategy that breaks down departmental silos, thus promoting corporate transparency.
Looking at risks in a different light
Implementing an enterprise risk management framework means finding the right balance between what risks to take on and what to mitigate so you can make way for comprehensive growth that adapts to whatever challenges that may come your way.
It’s also worth noting that ERM is a team effort. When the workforce knows what is risky and what is not, they can act on it accordingly and use it for their leverage. This kind of anticipatory behaviour opens more doors despite the uncertainties ahead.