This week we will tackle the subject of Enterprise Risk Management or simply put ERM and what benefits it brings to the organization. Now we going to discuss about Why Should Enterprises Manage Their Risks? The overall topic can be hard to define, and that is why in 2004 the Committee of Sponsoring Organizations (COSO) decided it was necessary to create a formal definition. Thus ERM was defined as “a process, effected by the entity’s board of directors, management, and other personnel, applied in strategy-setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within the risk appetite, to provide reasonable assurance regarding the achievement of objectives.”
I. A more risk oriented culture: By having a company culture that is inclined with thinking about risks proactively from top down of the hierarchy – the effects trickle down through to the rest of the organization. It forces the culture of the company to think about risks in a more open manner to deconstruct risks and seize potential opportunities while mitigating the actual risk.
It forces risk discussions to become part of the overall strategic thinking of a company, business processes and business units. This allows a better understanding of risk at all levels and eases the sharing of information.
II. Risk reports are standardized: ERM makes understanding the multitudes of varying data (Risk Indicators, Risks as they emerge, mitigation strategies) simpler through standardized reports. This allows for managers to tackle issues with risks based on areas of importance, and get a better idea of overall risk issues such as tolerance/threshold. ERM allows for reports to be accessible, concise, and flexible while making it easy to aggregate all relevant risk information to be shared company wide.
III. Improved insights on risks: All ERM help develop leading indicators which are designed to help detect potential risk events and provide early warnings to better react. ERM develops a different way at looking at risks; traditional risk analysis generally deals with avoiding/managing risks. ERM provides a look at risks which aims to quantify risks and to evaluate said risk to use it as a competitive advantage (through taking advantage of market conditions, increasing performance capabilities, exploiting conditions to improve competitive positions).
IV. Resource utilization: Risk management involves utilizing resources within the company to facilitate the sharing of information and performing activities to actively mitigate risks. ERM allows for companies to strategically allocate resources so they are used as efficiently as possible by reducing redundant tasks.
In a nutshell ERM allows for companies to better coordinate entity wide efforts to better mitigate risks, seize opportunities, and standardize reporting. Although the key benefits are listed above, by no means is that all the benefits ERM brings to the table. As evident in the KPMG survey, cost saving (through reduced operational costs and reduced debt costs), and improved shareholder values are some other reasons to consider ERM.