A Run Down of Enterprise Risk Management
What is Enterprise Risk Management?
Every business owner knows that cybersecurity threats are a serious concern. As organizations collect and store more sensitive customer data each day, it's critical to approach risk carefully. And that's what enterprise risk management is all about. It's how a company optimizes decision-making as it pertains to potential security threats.
But risk management is about much more than mitigating hackers and online attacks. Business executives employ an enterprise risk strategy to minimize all risks and pinpoint potential threats. These can include financial risk, natural disasters, non-compliance risk, reputation risk, operational risk, and competition risk. Many factors drive a successful ERM program. These include-
Stats on Enterprise Risk Management:
1. Risk Management Strategy
To approach risk management, a business needs to first identify its strategies and priorities. Potential questions to ask include
- What are the objectives of a risk management plan?
- How will the business approach each risk?
- Which individuals manage the risks? Where are they located?
- Is there any data available to strengthen this disruption management framework?
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2. Ownership in Enterprise Risk Management
Someone needs to be in charge to effectively manage risks. The risk owner is typically a manager, a team of high-level executives, or other stakeholders in each business unit. These individuals appropriately manage each risk, depending on the category of risk.
The way a team manages a risk also depends on the risk appetite of the business. Risk appetite refers to the amount of disruption a company can handle and still meet business objectives. The risk owner only manages the risk itself and doesn't respond to a disruption. Other individuals are responsible for those tasks.
3. Competencies in Risk Management
Each risk-related team member needs to know their responsibilities. Everyone should have the expertise and competence to perform their particular roles when a disruption arises. Individuals and responsibilities fall under four different categories. These include -
- Risk Governance - Structure that supports decisions on risk and oversees the risk management process
- Risk Management - Identifies, assesses, evaluates, and mitigates risks. Also monitors risks
- Risk Responses - Eliminates or minimizes risks
- Risk Monitoring - Tracks each risk and watches for new risks
4. Decision-Making in Enterprise Risk Management
All experts that are a part of the four competencies should involve themselves in the risk management process. They must be effective problem solvers and decision-makers. This will ensure they spot each risk before it becomes a bigger concern.
Risk management requires team members to quickly put up barriers, work with others, and communicate effectively. If all four competencies are not in place, the entire risk management strategy can collapse.
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5. Operations in Enterprise Risk Management
An ERM framework should integrate with day-to-day operational strategies and policies. There should be policies and training to ensure each risk team member knows exactly what to do.
Executives need to put controls in place to mitigate risk at all levels so the risk team does not become overwhelmed with managing risk.
6. Regular Monitoring of ERM Process
The ERM process typically requires certain team members to regularly monitor risk management performance. Executives pick a set of metrics and KPIs to ensure everyone knows exactly how effective the risk management framework is.
It's good for team members to monitor KPIs in real-time and adjust any inefficiencies as they arise. That way, the organization can resolve small inconsistencies before they become larger concerns.
7. Leadership in a Risk Management Enterprise
An effective risk management enterprise needs good leaders to carry out the various risk strategies. Leaders should take control over the entire process and generate guidelines to ensure success. This will help build a security apparatus in each sector of the business.
It's also critical for leaders to monitor how effective each risk strategy is and not just assume they work. Risk management team members should provide regular reports to show the performance of each policy.
The Importance of Enterprise Risk Management
It's usually easy to identify common risks, such as cybersecurity or compliance issues. But what about irregular risks like an economic downturn or natural disaster?
Risk managers need to carefully prepare for all potential disruptions to ensure an organization is safe from harm. While it's impossible to anticipate everything, leaders that prioritize risk assessment are more successful. The reasons for this include
- Reach the Reward - New business opportunities are both risky and rewarding. An ERM strategy can help to ensure an organization achieves the reward rather than a loss.
- Make More Money - An ERM program can help an organization know which risks to take to achieve higher profits.
- Projects Don't Entirely Control Risks - A money-making project is only successful when an ERM strategy minimizes the financial risks associated with it.
- Strong ERM, Strong Enterprise - An organization is only as successful as its ERM strategy. Leaders who have no program in place to mitigate risk and achieve reward use too much guesswork and don't take the right opportunities.
- Standardized Procedures - When a project fails, an ERM policy can address what happened. A standardized approach ensures everyone knows exactly what to do and when. This increases workplace accountability.
Benefits of Enterprise Risk Management
It's not only impossible to avoid risk, but it's also a bad idea. Entrepreneurs who avoid risk and run their business within overly cautious parameters tend not to survive very long. At the same time, entrepreneurs need to be prudent in how they approach risk and reward. It's not helpful to spend too much time and resources on every potential opportunity. This is a surefire way to lose money and damage the organization's reputation. So, what should a business do?
A risk-aware business knows the importance of a good ERM framework. It helps to pinpoint the correct risks to take or not take to ensure the best outcome. Other benefits include-
1. Company Culture that Prioritizes Risk Management
An effective ERM strategy ensures everyone is risk-aware in each sector of the organization. A risk-centric company culture empowers individuals to discuss risk strategies and eliminate any information silos.
A formal approach helps each business unit manage its tasks and requirements more effectively. Anyone will feel free to share the experience with risk and reward, which can improve decision-making across the organization.
2. Standardized Reporting of Risk Management
An ERM framework helps individuals analyze and report on potential risks. Leaders can pick a set of KPIs and metrics to ensure each competency area is on track to manage risk. Team members print reports to show progress towards risk objectives.
This ensures management knows exactly how each risk strategy performs or whether there are any emerging disruptions. It can help leaders better understand the overall health of the organization and what it needs to achieve financial rewards.
Benefits of Reporting and Analytics:
3. Focus and Perspective on Risk Management
Enterprise risk management provides key indicators so team members can identify risk before it arises. Leaders that use metrics to track risk strategy performance optimize reporting and data analysis.
Individuals can track real-time problems and pinpoint changes in the likelihood of risk. Businesses can then quickly update their risk strategies or seize opportunities before they are lost.
An ERM also allows individuals to better understand all areas of risk management rather than just mitigation. This shows an organization when to take an opportunity or change activities to gain a competitive advantage.
4. ERM Process Improves Resource Allocation
An ERM doesn't mean that executives shouldn't manage daily risk. However, it can help individuals allocate resources and employ tools to consistently improve risk management functions.
A good risk management strategy identifies redundant efforts and eliminates inefficiencies. This helps everyone know exactly what they need to do and when to do it. As a result, the business won't waste as much time or money on unprofitable endeavors.
5. Risk Management Improves Compliance
Compliance risk is a huge concern for many industries, particularly for those in financial services. Banks do everything possible to protect themselves from hacks and leaks to ensure they achieve compliance and mitigate fraud.
Every organization needs risk management (ERM) policies that address industry-related compliance concerns. This can prevent audits, reviews, litigation, and a ruined reputation.
Examples of Enterprise Risk Management
Enterprise risk management strategies pinpoint and prepare for disruptions. An effective ERM policy accounts for all of the various business goals and operational strategies. The ERM discipline changes as industry-related compliance concerns and external risks evolve.
While it was always critical for businesses to address risk, the digital transformation made it even more so. A set of best risk management practices are not always standardized across industries, but organizations recognize ERM's importance. Here are some examples of how businesses address risk management
1. Investors Study Company ERM Frameworks
Investors study different organizations' risk management policies to optimize decision-making. Company risk profiles allow stakeholders to pinpoint potentially profitable startups so they feel comfortable enough to invest. It also helps property owners and officials know which businesses to lease out to and which not.
An enterprise framework can address whether a business will pay the rent on time, are environmentally friendly, or good to their workforces. Though companies in the U.S. do not have to disclose their risk policies, it is more common that they do. It helps to improve their profiles and improve relationships with investors and the community at large.
2. Implement ERM Framework to Improve a Damaged Reputation
In the early 1980s, Johnson & Johnson suffered a reputation crisis when an individual poisoned their Tylenol bottles. This led to several deaths and scared both investors and consumers from the brand. However, the company acted quickly to address the problem and improve its reputation. It recalled all retail outlet products, worked with law enforcement, and kept the public updated. This quick risk management strategy proved to be an effective PR move.
Other organizations can use enterprise risk management to mitigate risk and improve their reputation. More recently, Chipotle suffered a public relations crisis when the salmonella outbreak infiltrated their supply chain. Several individuals were hospitalized and profits dropped for quite some time. It took time, but Chipotle restored its reputation and implemented new food safety practices. This improved consumer trust and eliminated much of the damage.
Difference Between GRC and Enterprise Risk Management
While both ERM and GRC strategies address the same set of concerns, they use different approaches. GRC stands for Governance, Risk Management, and Compliance. It classifies all of an organization's efforts in these three areas to meet both short and long-range goals.
An ERM strategy encompasses each sector of risk exposure rather than just those three areas. Here is further information about the distinction between this terminology
GRC vs. Enterprise Risk Managemen (ERM)
Organizations classify parts of GRC into separate processes. Governance, risk management, and compliance all have their own set of procedures to follow. Governance includes all of the audits, security measures, and operations policies within an organization.
Because each component has its own procedures, individuals are responsible for only the sectors that executives assign them to. This means that governance is run by one team, compliance another, and risk management by an internal third party.
Over time, more businesses implement an ERM approach for their GRC programs. This ensures GRC programs are not siloed and there are fewer duplicate efforts. While ERM has the same end goals as GRC programs, it encompasses every single risk-related area of an organization.
This includes everything from operational risk to reputation management to compliance concerns. ERM is more of a holistic approach towards risk management. It focuses on the root cause of risk, eliminates potential waste, and improves financial rewards.
While each business unit has its own tools and reporting capabilities in an ERM strategy, individuals have more access to other sectors. This eliminates duplicate efforts and inefficiencies so business owners can optimize decision-making.
How to Implement a GRC Strategy:
Key Takeaways of Enterprise Risk Management
In conclusion, here is what to remember about enterprise risk management
- Enterprise risk management includes a risk strategy, ownership, four competencies, optimized decision-making, operations, continuous monitoring of risk strategies, and good leadership.
- The benefits of risk management include a better company culture that prioritizes risk, standardized reporting, greater focus and perspective, better resource allocation, and improved compliance.
- Investors use organizations' ERMs to determine whether to invest in different businesses. Other businesses use ERMs to improve their reputations and brands.
- GRC focuses on governance, risk assessment, and compliance. Each area has its own strategies and managers. ERM is a holistic approach that focuses on an organization's risk strategy in each area.