Benefits of Enterprise Risk Management

By Robert Burrus

The framework is designed to help management and boards of directors answer these relevant business questions: 

What is ERM

The framework applies regardless of the size of the business or how a company wishes to categorize its risks. The circular depiction of the framework is highly intentional. The individual components (such as coverage or risk appetite) are not meant to be sequential, but rather a dynamic flow in both directions. Additionally, culture is depicted as the center/heart/foundation since, without the right culture, the other components are somewhat irrelevant.

At any given time, boards of directors and management must manage a portfolio of risks (from asset quality, liquidity, and interest rate, to business continuity, information security, privacy, etc.).

Main benefits of ERM

1. Improved Decision-making: ERM provides a comprehensive perspective on risk and opportunity across the organization, which leads to better informed strategic and operational decisions. It helps to prioritize risks and determine the most effective ways to manage them.
2. Compliance: With increasing regulations in many industries, ERM helps organizations comply with laws and regulations. Non-compliance can lead to penalties and damage to an organization’s reputation.
3. Financial Stability: By identifying and mitigating risks, an organization can avoid potential financial losses. It can also help to secure better terms from banks and insurers, as they have confidence in the organization’s risk management.
4. Operational Improvement: ERM aids in identifying inefficiencies and designing processes to mitigate risks. It promotes a proactive approach to handling risks, leading to fewer crises and surprises.
5. Enhanced Strategic Planning: ERM supports strategic planning by helping to identify potential obstacles and opportunities. It helps management to align risk appetite with business strategy.
6. Stakeholder Confidence: By demonstrating that an organization is proactive about managing risks, ERM can increase the confidence of stakeholders, including investors, customers, employees, and the public.
7. Brand Protection: By identifying and mitigating potential risks, ERM helps protect the organization’s reputation and brand.
8. Better Resource Allocation: By identifying the risks that could have the greatest impact on the organization, ERM helps ensure that resources are allocated where they’re most needed.
9. Increased Competitive Advantage: Companies that manage risk effectively are often better positioned to adapt to changes in their market environment, giving them a competitive advantage.
10. Cultural Shift: Successful ERM implementation can result in a cultural shift within the organization, where every employee becomes a risk manager, creating a risk-aware culture.

The science and art of measurement in ERM is about concluding which risks are significant and which ones are not, and where to invest time, energy, and effort. To accomplish the goal of measurement and evaluation, a business may adopt a simple model of color rating (green, yellow, and red) to a highly sophisticated risk-adjusted return on capital (RAROC), or perhaps a middle-of-the-road failure mode and effects analysis (FMEA) model.

The model below describes Enterprise Risk Management  

ERM uncovers risks in order to build organizational resiliency and sustainability. Organizational resiliency, or an enterprise’s ability to recover quickly from setbacks, is particularly important when risk is unavoidable or non-transferable.

Do we understand the root causes of the risk event? Is the risk acceptable within our risk tolerance? Do we have the appetite to take on more risk? If not, how can we prevent, mitigate or exploit the risk event (or its likely consequences)? What controls are in place to manage the risk?

Conclude 

You should not be running a business or a high-value project unless you have Enterprise Risk Management as part of your Management System