Managing risk is an aspect of any business. Whether Enterprise Risk Management (ERM) involves examining a business’s digital security arrangements or an investment firm checking its exposure to a significant asset, enterprise risk is a critical concept to understand. This holistic approach plays a role in protecting corporations against taking on an undue amount of risk. So, what is ERM? Here’s what enterprises need to know about how an ERM system works.
What is Enterprise Risk Management (ERM)?
The enterprise risk management definition is a methodology that looks at risk management from the strategic perspective of an entire organization. This top-down strategy analyzes risk from a broad-level view. In other words, rather than individual units of a business preparing their own risk management plans, this holistic perspective manages risk from a “business-as-a-whole” approach.
What it shares with traditional risk management frameworks is identifying, assessing, and preparing for the potential harm that could lead to losses or disruption to an organization’s activities. The main difference within the enterprise risk management framework is the actions taken may not make sense for an individual business unit yet may play into the objectives of the overall organization.
Benefits of Enterprise Risk Management
After establishing the ERM meaning for a specific business, why should an organization consider an ERM system over traditional risk management approaches? Some of the main benefits include:
- Awareness – Obtain more awareness about the risks facing an organization.
- Confidence – More confidence regarding meeting specific goals and objectives.
- Compliance – Better ability to maintain compliance across all areas.
- Efficiency – Operations can be made more efficient and potent with an ERM approach.
Enterprise risk still maintains the meticulous processes of traditional risk management, but this framework advances on those benefits and covers up the drawbacks of the conventional risk management process.
The Enterprise Risk Management Framework
The gold standard of enterprise risk management follows the Committee of Sponsoring Organizations (COSO) guidance. Organizations looking to implement a new enterprise risk management framework may choose to implement this system, which consists of specific, defined steps.
The internal environment, or tone of an organization, has a major impact on attitude toward risk and the ethical values the business chooses to embrace. Assessing the internal environment is the foundation of enterprise risk management because it defines how an organization is managed and the flaws inherent within how a business runs its operations.
Based on its risk appetite, the top-level team of an organization must set clear objectives consistent with the company’s overarching mission. At the same time, potential risks inherent within pursuing particular objectives must be kept in mind.
Assess potential internal and external events that may influence the achievement or failure in pursuing specific objectives. COSO makes the distinction between events that represent risks and events that represent opportunities. Both should be taken into account.
Conduct a risk assessment detailing the likelihood of an event coming to pass and the impact if it does occur. This is the basis for how to prepare and react to specific defined risks.
The next step in the enterprise risk management framework is risk response. Proposed actions in response to risk must be consistent with the attitudes of the board. As risk response plans are established, ERM is all about treating risks not in isolation but with the whole business in mind.
Once a risk response plan has been designed, the appropriate controls must be put into place to ensure that each response plan is effective. Pay special attention to the human element inherent within control as managers and staff need to respond in the right way. Problems could involve managers not taking controls seriously or collusion to override controls.
Information and Communication
A regular supply of information ensures that managers and staff can execute their responsibilities. The information must be identified, captured, and disseminated within a timeframe and format that enables enterprise risk management to be an asset rather than a hindrance. Effective communication is key to making the whole system work in practice.
Full monitoring must be maintained following implementation to ensure the framework is having a real impact on the organization. Management teams must be monitored and modified if failures are detected. COSO’s research revealed that unmonitored controls decline in effectiveness over time.
Enterprise Risk Management Example
Mars Inc. is an international food company that developed an ERM process from 2003 to 2012. Their framework was based on the philosophy that risk is an opportunity, and they wanted to implement it via their company’s decentralized structure. The structure compelled teams to analyze risks and color-code them according to the likelihood of success. Some enterprise risk management examples included increasing direct-to-consumer shipments by 12% and bringing a new plant online by the end of Q3, which was coded red. Mars Inc. even created a dashboard to list initiatives by order of priority and automatically communicate red issues upward as a rule.
No two risk management systems are the same. They must be tailored to the organization in question. Digital security is one potential risk all businesses must consider. Reduce your security risk with the help of the TokenEx Cloud Data Protection platform. To learn more about how to enhance your security, request a free demo today.
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