Enterprise Risk Management
In this article you will find a practical explanation of Enterprise Risk Management. After reading, you will understand the basics of this method for business. Before delving into what business risk management is, it is necessary to remember that no company is free from eventualities that put processes at risk or completely interrupt production. So, this can occur in any industry.
What is Enterprise Risk Management?
Enterprise Risk Management is the process of identifying, analyzing, and mitigating business risk in order to minimize potential negative impacts on the organization. The benefits of ERM are plentiful. It increases awareness of risks, helps identify ways to manage them for each specific activity, and provides input into management decisions that would otherwise be informed only by traditional financial analysis.
The ERM process can be broken down into three phases:
- Enterprise-wide risk assessment
- Enterprise-wide risk response planning
- Enterprise-wide risk monitoring
The scope of an organizations’ ERM process should encompass all significant components in order to assess risks effectively. A company’s ERM process should take into account any external pressures that could potentially affect its operations or influence its performance in some way.
Definition of Enterprise Risk Management
Enterprise Risk Management (ERM) is defined as a company’s systematic process for managing risk. It is a continual, forward-looking assessment of potential future events that may impact the achievement of the company’s objectives. ERM not only includes assessing and analyzing risk, but also developing strategies to mitigate or eliminate potential adverse effects.
ERM is an integrated part of most business strategies because it helps companies maintain profitability, ensures sustainability, and protects shareholder value by reducing or eliminating unnecessary risks.
To understand ERM better, let us look at how it is different from traditional management practices.
Traditional management practices focus on controlling what you can see today, while ERM looks to the future and assesses risks at multiple levels in order to help companies prepare for any eventuality.
Types of business risks
Various types of business risks can be presented, such as: financial, environmental, systematic, unsystematic, legal risks, among others. You must be prepared to know how to deal with them according to the industrial field in which the company is.
Use of Technology in Enterprise Risk Management
ERM is only as effective as the technology that supports it. A company’s risk management system should include automated tools for performing data consolidation, assessments of business processes, monitoring business performance and assessing compliance with regulations.
Supported by ERM software, companies are able to implement a single information source where all information on risks can be collected, consolidated and analyzed efficiently.
Business intelligence enables the entire organization to work on common data, which ensures consistency in decision-making across different divisions.
Enterprise Risk Management Software
Within a risk assessment, the system should identify events and their impact on a company’s operations. For example, if a natural disaster damages one of a company’s warehouses, it will need to be repaired or replaced. The risk management software facilitates prioritization of risks based on likelihood and potential impact. As such, the company can determine which risks are more likely to occur, as well as those that would have the greatest effect on its business continuity. In cases where assets require replacement, it is critical for companies to understand vulnerabilities in advance, so they can make effective strategic decisions.
Framework for Enterprise Risk Management
ERM Framework consists of five components:
- Identifying potential risks
- Analyzing the probability and consequences of risky events
- Developing risk response strategies
- Implementing these strategies during day-to-day operations
- Monitoring risks over time
Below are guidelines for developing an ERM framework.
Identifying potential risks
Identifying potential risks is the process of systematically evaluating all Company activities and organizational units in order to identify potential events or issues that may impact objectives.
Analyzing the probability and consequences of risky events
This step requires an assessment of both likelihood and consequence for each individual risk, prioritizing them according to their relative importance followed by creating a risk register with all relevant information about these risks, for example, financial exposure or operational impact.
Developing risk response strategies
Risk response strategy involves developing plans for best mitigating action depending on the level of severity involved in a given event; it can be used when there is considerable uncertainty surrounding future events such as natural disasters, terrorist attacks etc.
Implementing these strategies during day-to-day operations
Implementation of risk response strategies involves the allocation of responsibilities to respective individuals, development of policies and procedures to support these actions, or changes in business operations.
Monitoring risks over time
Monitoring is a continuous process which requires companies to regularly review all information related to risks in order to address issues before they escalate into crises. The following are guidelines for monitoring existing risks:
- Maintaining proper records – Records should be kept up-to-date about events such as their source, number, and severity so that trends can be identified and countermeasures can be properly implemented.
- Assessing the appropriateness of preventative measures – Companies should assess if their current measures are appropriate by comparing them with new risks identified in the future. If any changes are required, they should be implemented immediately.
- Assessing the results of preventative measures – Companies should regularly assess the effectiveness of their risk response strategies to check if they are achieving the desired objectives, while also identifying potential issues that could arise due to policy implementation.
Over time, companies can use this information to develop a list of risks that should be managed based on their cost-benefit analysis; this allows them to prioritize strategies and activities which offer maximum value for minimum monetary investment.
Examples of Enterprise Risk Management cases
A major oil company was considering creating an offshore platform for drilling in the arctic region due to ample untapped resources. However, this venture required extensive research on how to properly scale up their current safety management protocols that are typically used in warmer regions to ensure stability and functionality of the structure in icy waters.
Due to recent threats of terrorism, a fashion designer increased security at all its retail outlets by hiring guards with military background who could detect suspicious activities through experience in high-risk areas; they also installed metal detectors at entrances and carried out stringent bag checks for any bags brought inside the store.
A construction company began putting together building plans several years ahead of when they’re needed so that when the time comes, they can make better informed decisions about which materials and technologies to use in order to meet environmental standards.
A major telecom company implemented a policy whereby all employees must complete an annual training program related to their respective roles; this helps them improve efficiency while also reducing the risk of human error during operation, such as accidentally prioritizing low-profit projects over high-revenue ones.
Due to increased threats of cyber-attacks, a government department reevaluated its internal policies on data security, including limiting access only to those who need it for their daily tasks and enforcing stricter requirements on passwords and user credentials so that it’s harder for unauthorized users to enter secure systems and data sets.
After several deadly plane crashes, a major airline began implementing the latest technology to prevent mid-flight turbulence, such as using predictive algorithms that can detect approaching storms and informing pilots of potential risks.
ISO regulates Enterprise Risk Management
ISO 31000: 2018 regulates companies with international standards in order to increase the probability of achieving objectives, improve the identification of opportunities and threats, and efficiently allocate and use resources for the treatment of risks at a strategic and operational level.
Giving the following:
- Create value
- Integrates organizational processes
- Take decisions
- It considers human and cultural factors
Companies that manage business risks can be backed by ISO 31000 to give reliability and strength to people who want to be part of the company such as investors or potential clients, since the ISO seal gives that added value by international standards that govern it.
Now It’s Your Turn
What do you think? Do you think it is necessary to put business risk management into practice? If so, have you backed those risks with ISO regulations? Do you have anything else to add or any suggestions to share?
Share your experience and knowledge in the comments box below.
- Hoyt, R. E., & Liebenberg, A. P. (2011). The value of enterprise risk management. Journal of risk and insurance, 78(4), 795-822.
- D’arcy, S. P., & Brogan, J. C. (2001). Enterprise risk management. Journal of Risk Management of Korea, 12(1), 207-228.
- Nocco, B. W., & Stulz, R. M. (2006). Enterprise risk management: Theory and practice. Journal of applied corporate finance, 18(4), 8-20.
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