Risk-taking in the corporate world can move a company forward and help it achieve its objectives or lead to failure and financial loss. Managing any risks, which can evolve quickly, is crucial. Enterprise risk management (ERM) provides the necessary tools to maximize a company’s potential and growth.
Risk management approaches vary considerably depending on the type of company and its objectives. A series of standards are used worldwide for systemic and effective implementation of desired strategies.
In a traditional approach to risk management, various individuals may oversee areas associated with their responsibilities. Here are some examples of a traditional approach and who might be involved:
- A Chief Financial Officer or Treasurer is often responsible for managing cash flow, analyzing the company’s financial weaknesses and strengths, financial planning, and financing.
- The Chief Technology Officer might be responsible for developing, evaluating, implementing, overseeing, and managing the business’s technology resources throughout the IT department. With technology innovating constantly, the CTO must stay current on the latest trends and ensure data privacy safety.
- A Chief Operating Officer manages the company’s daily business operations, supervising and working closely with heads of various departments to ensure smooth operating procedures.
These are but a few examples of how a traditional approach to risk management works. There are limitations to this traditional approach, including a lack of awareness of how risk may affect another area of the business, internal vs. external operating risks, and not properly creating and implanting a strategic plan that affects all areas of the business.
With enterprise risk management, the business implements a top-down strategy that identifies, assesses, and prepares for dangers, hazards, losses, and other potential harms that could impact the company’s objectives and operations.
Elements of Enterprise Risk Management
Enterprise risk management identifies and addresses various aspects of a business, including compliance, operations, finances, strategies, legalities, and security risks.
There are eight key components a company must consider when creating an effective enterprise risk management program:
Often considered the first step, objective setting determines the company’s goals and objectives. Determining strategic objectives helps the company focus on growth, market share, earnings, investor returns, and service while executing and implementing these strategies.
ERM focuses on internal actions taken by the company to create procedures and policies that minimize risk. Detective controls help recognize when risky actions occur, and preventative controls help stop them from occurring.
Internal controls help reduce risk to an acceptable standard, with anything left over becoming a residual risk. An effective internal control environment should be realistic and balanced, considering the company’s corporate culture and employees’ actions.
ERM focuses on helping a company identify potential positive and negative events that can affect the business’s ability to operate successfully.
Also called risk appetite, ERM focuses on how much risk a company is willing to take to achieve its financial goals. It also looks at the likelihood of risks and their financial impact.
ERM sets standards for how a company can respond to potential risks through avoidance, reduction, acceptance, and sharing:
- Avoidance: Forgoing an activity that is deemed not worth the risk.
- Reduction: Minimizing the potential risk through changes in actions.
- Acceptance: Determining the risk is worth it by carefully analyzing the actions and outcome.
- Sharing: Utilizing a third party to share in potential losses, such as with an insurance policy.
Effective information systems capture data that can minimize risk. Communicating with employees keeps them focused on and in agreement with strategies for growth.
Internal or external auditing and reviewing company policies and procedures help minimize risks.
Why Do You as CEO Need ERM:
As a company leader, you must carefully manage any risks to maximize your company’s profitability and growth. Business conditions can change daily, sometimes hourly, depending on the type of business and the state of the economy and the world. Being aware of how these changes can affect your business is crucial.
As a chief executive officer, you are responsible for the ultimate management of the company. The CEO is often the public face of the company and responsible to the board and shareholders to make the best decisions to propel the business forward.
Here are some reasons why CEOs can benefit from Enterprise Risk Management:
Sets the organizational-wide expectations around a company’s culture
Creating a set of strategies and standards can improve the company’s culture. Employee buy-in is crucial. Greater employee satisfaction through better communication promotes a more positive work environment and increased productivity.
Make a company more prepared for risks and uncertainties
ERM helps to prepare a company for potential risks and how to deal with them. Unexpected or unforeseen risks can cause financial ruin.
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ERM helps to identify areas of inefficiency to determine better actions. With better policies and procedures in place, more efficient operations and reporting help guide future decisions.
ERM helps to identify potential losses and growth opportunities for better decision-making processes. Enterprise risk management strategies show where and how to make improvements that reduce effort and cost.
Eliminate redundant processes
ERM can help identify redundancies throughout the company, especially if different departments overlap in their actions.
Greater customer service
Identifying areas for improvement can also lead to better customer service. ERM helps get employees involved in strategies that are best for the company, improving workplace positivity, which extends to customer service.
Implementing effective enterprise risk management strategies may vary depending on the company’s business, size, objectives, and risk preferences. Defining the risk philosophy, creating action plans, thinking creatively, communicating priorities, assigning responsibilities, leveraging technology, maintaining flexibility, and continually monitoring any actions help to achieve the desired goals.
Effective ERM requires the company to communicate openly about risks and address potential actions. By doing so, employees understand what standards and procedures the company has in place.
Ultimately, the goal of enterprise risk management is to protect the company through strategic planning and creative strategies that are ready to address any potential adverse events that could occur.