Enterprise Risk Management (ERM) – What’s it all about?
In recent times, boards and executives have started to pay more attention to the concept of Enterprise Risk Management (ERM), and its implementation continues to evolve. During this COVID-19 period, a better understanding of ERM has developed in terms of its advantages, purposes, and how organizations should use it to help weather the ups and downs of unforeseen business disturbances.
ERM – The relationship between strategy and risk
Boards are primarily responsible for overseeing their organization’s strategies, and this task includes creating plans based on an evaluation of the organization’s success or otherwise in implementing those strategies. While unexpected events such as COVID-19 may impact an organization’s performance in this area, these are considered as risks that it must address.
Every strategy involves risks: climbing Mount Everest or crossing a busy street in the City of Lagos, Nigeria. The latter is probably beyond dangerous but necessitates less planning and strategy than Everest to realize.
Identifying how strategy and risk are related is key to determining which risks are most worthy of attention from the organization’s perspective. Some risks are more severe and have a more significant impact than others. ERM involves not just highlighting risks, but also the consideration of which risks are most likely to impact the organization’s overall performance or ability to carry out specific goals. For an organization to be successful, an effective ERM process and plan must follow to help identify and respond to known risks of a particular nature.
ERM assists organizations to find, evaluate and work with the risks that are ever-present in their strategies. As a process, ERM is a logical and worthwhile way to foster and safeguard value within the organization, and as such, it should be a crucial part of any strategic planning activity.
Knowledge of ERM practices allows organizations to implement them accurately and avoid common pitfalls. Crucially, ERM should not be siloed within an organization; rather, it must be integral to all aspects of the organization’s planning – how it conducts its performance evaluations, and how success is ensured. This view responds to the oft-asked query, “What is the real value of ERM?”
Any attempt to understand ERM’s value that does not consider its integrated nature in an organization’s operations will fail. However, if ERM is viewed as part of an organization’s fabric, its value becomes evident. This results in better decision-making and, eventually, enhanced performance in terms of the organization’s goals, plans, and business ambitions.
Boards and management must understand these aspects of ERM to better their organizations and appreciate what ERM can offer in terms of advantages and return on investment.
So, what are some of the benefits of integrated Enterprise Risk Management
As ERM has developed over the years, it has been determined that it must be incorporated into the organization’s current processes. This includes strategic planning, performance management, internal control, and governance. Keeping the ERM function apart from the rest of the organization rarely allows for the advantages of ERM to be enjoyed to its fullest extent. Meanwhile, if ERM is integrated completely, this can be achieved successfully.
ERM should not be viewed as a novel concept; instead, it should be added to what is already happening to make it better. This is crucial to the success of Enterprise Risk Management and will also help maximize the return on investment in using such an approach.
The benefits are basic, but powerful
- ERM will create more opportunities by understanding the pros and cons of risk
- More successful outcomes and benefits while minimizing possible negatives
- Ability to respond – proactive = Preventative – to risks, rather than being reactive = Responsive.
- Bolstering the ability to find and deal with organization-wide risks
- Minimizing variability in performance
- Enhancing resource management
- Fostering more vigorous and complex dialogue around risk for both management and the board.
What makes it a recipe for success
A strong understanding of ERM concepts is needed to create a good foundation on which to commence implementing or improving ERM initiatives. Past experiences have indicated that some key aspects are common to effective ERM initiatives that organizations should consider when beginning to Implement and integrate ERM.
These primary elements can assist directors and management in overcoming known obstacles and minimize issues as they commence the ERM initiative.
- Gain the support of the board and management
- A strong understanding of the purpose of ERM must be shared
- ERM must be incorporated into all elements of the organization
- Begin by applying ERM to the organization’s overarching plans and goals
- The most important risks are the ones linked to the organization’s main strategies
- Build gradually, starting with straightforward activities – keep it simple!
- Use resources and risk management practices as a foundation
Another perspective on the advantages of ERM is that it fosters enhanced decision-making processes within the organization. Every organization’s management and board members must address a never-ending stream of choices regarding strategy. ERM can bolster these decision-making processes as it offers extra detail regarding strategic planning that, in turn, informs decisions that result in better value prospects and the consolidation of existing value.
Today’s business climate during the current pandemic can be unpredictable, complicated, and involves instability in terms of risks. Therefore, business leaders must address the resultant environment strategically, look to the future, and learn from the past.
Concurrently, this scenario offers valuable opportunities to those who are adept at mitigating risks and maximizing opportunities. ERM processes are an effective way to achieve this, particularly when they’re seamlessly incorporated into the organization’s existing plans and procedures – the key starting point is a comprehensive knowledge of ERM’s purpose and how it can operate to allow business leaders to make sound choices and fulfill business goals successfully.
by Ken Smith