What Is Enterprise Risk Management?
Enterprise risk management, also known as ERM, is a framework that allows you to run your business more strategically. It involves using a holistic approach to identify, assess and reduce risks that could harm your business at any and every level. By examining operational, financial, social and environmental risks through a critical lens, enterprise risk management gives you the chance to position yourself in a place to be a leader in your industry.
What Is Business Risk and Why Should You Care About ERM?
When business is going well, it can be easy to feel like there's nothing to worry about. In reality, every business is vulnerable to different factors. In the world of business, risk is defined as any potential event or circumstance that could prevent your company from reaching its goals or bring liability to your organization.
Risks have two key elements: likelihood and impact. You must consider how likely a risky event is to occur and how severely it could affect your operations. There are different types of risks all businesses face: financial concerns such as market conditions and operational worries such as supply shortages. Every business also faces additional risks specific to its industry; a trucking company faces a lot of specific risks related to driving and maintaining a fleet.
You can't eliminate risk altogether so the smart choice is to manage it. This is where enterprise risk management comes in. ERM is a priority to care about because it helps safeguard your company's future.
The ERM Framework
As you look at "What is enterprise risk management?", you'll start to look at the ERM framework. It's this structure that makes enterprise risk management useful and powerful. There are different ways to implement ERM, including the widely used and recognized COSO Enterprise Risk Management Integrated Framework. It has eight key components:
- Internal Environment: Managing and understanding the tone top leadership shares with the company and the overall risk culture and ethics system.
- Objective Setting: Defining organizational objectives to align risk management efforts with your overall strategic goals.
- Event Identification: Systematically identifying internal and external events that could impact your business.
- Risk Assessment: Analyzing the identified risks in terms of likelihood and impact, then prioritizing what to respond to.
- Risk Response: Implementing strategies to address identified risks. Common strategies include risk avoidance, mitigation, transfer (via insurance) or acceptance.
- Control Activities: Creating policies, procedures and processes to ensure risk responses are carried out effectively.
- Information and Communication: Communicating timely and accurate risk information throughout the organization.
- Monitoring: Continuously monitoring risks and responses and adapting as needed.
Each business can adjust the process as required for specific business needs and expand the ERM plan as the business grows and evolves. New enterprise risk management evaluations are especially important when entering a new market or investment.
The ERM Process
While the COSO framework provides a foundation, the benefits of enterprise risk management become clear once you dive into the process. Begin by brainstorming at every level of the company to find potential risks. After that, evaluate the risk in qualitative or quantitative terms to measure impact and rank the risks, addressing the most critical ones first.
Next, plan how you will react. Create risk response strategies for all major risks that you have identified and put a process in place to monitor them. This is a cyclical process that you will need to revisit as the circumstances of your business change. Throughout this process, encourage a culture of risk awareness to empower employees to identify and report potential risks.
Advantages of Enterprise Risk Management
The advantages of embracing Enterprise Risk Management go beyond just avoiding obvious risks. Embracing ERM improves overall understanding of your company's standing in the industry and market while forcing you to look ahead to what is coming. Your company also becomes inherently more resilient because you've already planned for many worst-case scenarios. Mitigating risks can also reduce costs associated with regulatory lapses while increasing stakeholder confidence.
Getting Started with ERM
With an understanding of what is enterprise risk management, it's time to move forward and learn how to implement a framework for your company. Here's a simple way to begin:
- Define Your Risk Appetite: Determine the level of risk your organization can reasonably accept. Some risks result in temporary losses while others may force major changes for your business so this will guide your risk management decisions.
- Build an ERM Team: A team dedicated to risk management should have representatives from every department so nothing is overlooked.
- Develop a Risk Management Plan: Outline your ERM process to share with your team. Think about risk identification, assessment, response and monitoring strategies.
- Implement Risk Management Tools: Explore software and other tools to track ERM activities. You should also consider finding risk management partners by working with HUB International.
Keep in mind that ERM is not a one-time project or initiative. When staff asks "what is enterprise risk management?", the answer should involve company culture and goals to make it clear that risk management matters at every level. Your success and growth depend on being able to manage risks in the short and long-term view.
Embrace Enterprise Risk Management Today
Every day, businesses face new and growing risks that could ruin profitability or even force a company to close. Enterprise risk management is a way to add a layer of defense to your operations. It enables you to make smarter decisions while being resilient and forward-thinking. Let HUB International help you explore the power and potential of enterprise risk management.
Sources:
https://erm.ncsu.edu/resource-center/getting-started-with-enterprise-risk-management-templates/