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What is enterprise risk management?

by Dan Byrne

What is enterprise risk management

What is enterprise risk management? It’s a comprehensive strategic approach to any risk that could facilitate an organisation’s ability to grow. 

It’s essential for your corporate governance training journey.

What is enterprise risk management?

Enterprise risk management (ERM) is a company-wide approach to risk. It seeks to align strategy, processes, people, technology, and knowledge into one single effort to identify the uncertainties the company faces as it creates value. 

It’s broader than what we might call “traditional” risk management, where different teams or departments take charge of risk mitigation in their particular area. Critics of this approach argue that team-based work can risk forming silos that could miss key risks.

The main principle of managing ERM is similar to ESG in that companies must fully integrate it into their overall strategy rather than treat it as a side project. 

It involves identifying potential events affecting the entity, managing risk appetite, and providing reasonable assurance regarding achieving entity objectives.

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Is it popular?

Very. 

ERM commands around $5 billion in worldwide investment, and that figure is expected to grow. 

The approach is heavily used in areas like financial services, where quantifying risk across the business is easier and more essential.

Why is enterprise risk management important?

ERM is crucial because it provides a holistic framework for managing risk across an organisation, enhancing the capacity to build value. By proactively managing potential pitfalls and uncertainties, companies can:

  • Protect and create value for stakeholders.
  • Improve decision-making capabilities.
  • Enhance resilience against shocks and adversities.
  • Strengthen compliance with relevant laws and regulations.
  • Foster a risk-aware culture through improved visibility of risk and reward trade-offs.

What should a board of directors know about enterprise risk management?

Boards are the crucial backstop in a company’s decision-making. So, there are two things that every board should know about ERM:

  • If a board doesn’t pursue it, all directors should still be aware of it and consider it a viable option for risk management. 
  • If a board does use the approach, they should know exactly how it works, how to oversee its implementation, and what questions to ask when it comes to evaluating it. 

Boards using the ERM approach should ensure its processes are fully integrated into corporate strategy and operations. They should also communicate effectively with all relevant stakeholders about the company’s risk appetite – or how much risk the company agrees to accept in pursuit of its objectives. It’s also essential to explain how you arrived at this conclusion. Numbers mean everything. 

The other key point about the ERM process – like most strategic approaches – is that regular assessments and reporting are vital. So, ensure you devote adequate resources and training to this and maintain continuous oversight.

In summary

Enterprise Risk Management is a widely-used strategy for organisations aiming to navigate the complex landscape of modern business risks. 

By implementing a systematic approach to ERM, boards can help secure their business’s long-term success and sustainability. 

Board members play a pivotal role in fostering a culture that values and utilises ERM as a key component of governance and strategic planning.

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Risk
Risk management