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Enterprise Risk Management (ERM) Basics
Whatever level of risk management, change management or similar process your company has in place, sometimes people like to obtain working definitions without having to ask the expert who enjoys using hard to understand acronyms.
Difficulty to understand the industry vernacular may be part of why a recent study showed 89% of executives said they wanted to build an ERM process into their organizations; yet only 11% of their companies had completed the implementation.
Five primary aspects follow:
1. What is Enterprise Risk Management?
The following definition is from COSO's Enterprise Risk Management - An Integrated Approach, which is a reference work for ERM.
Enterprise risk management is a process, affected by an entity's board of directors, management, and other personnel, which is applied in strategy setting and across the enterprise. Its goal is to provide reasonable assurance regarding the achievement of organizational objectives by identifying events that may affect the entity and managing risk to be within the entity's risk appetite.
* COSO means Committee of Sponsoring Organization of the Treadway Commission. The book was authored by PricewaterhouseCoopers.
2. What is risk appetite?
Whether explicit or implicit, risk appetite is manifested in the strategic risk management philosophy of the organization. For example, a startup has a greater risk appetite because it seeks large returns. Innovation is encouraged and with innovation comes the risk of failure. On the other hand, the risk appetite of a mature company may be much lower because stakeholders expect smaller returns on their capital in exchange for more stability.
3. Why is ERM a program rather than a project?
A project has a discrete beginning and end. ERM is a set of on-going activities such as the tracking of the cost and quality of the program as well as improvement in processes and methods. A program is embedded in an organization that brings organizational focus and encourages everyone to see ERM as part of their job.
4. What are the benefits of ERM?
Enterprise Risk Management enables the organization to examine alternative strategies and objectives with the associated risks in mind. An ERM program evaluates risks up front and chooses among risk management alternatives thereby improving the organizations response to risk.
By looking at potential risk events, management has an increased ability to recognize and act upon opportunities. In-depth knowledge associated with the risks facing an organization allows it to better understand its capital needs and improve the allocation of capital.
5. How does ERM help an organization fulfill its mission?
An organization's mission eventually translates into a choice of strategies that then breakdown into specific objectives. However selected strategies and objectives do not exist in a vacuum because every effort to realize an objective involves risk. The more aggressive the choices, the greater the risk. ERM helps an organization achieve its mission by allowing management to choose strategies and objectives that reflect its risk appetite.
Unearth the hidden risks that could topple your company, so you can use Best Practices for Long-Term Business Health to increase the likelihood of reaching your long term personal and personal goals.
Again, the good news is that if you already have any of these systems in place (strategic planning, quarterly budgeting, risk management, operations review, entire enterprise risk management, risk assessment, process improvement, performance management, or contingency planning), you have foundation blocks to improve your risk management capabilities by using some of the steps above.
About the Author Bottom line? What is the cost of what you do not know in your business? For more details, the book, Stick Out Your Balance Sheet and Cough: Best Practices for Long-Term Business Health is available at Amazon or visit .
From Gary W Patterson Copyright 2009
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