What Is Enterprise Risk Management & Its Importance

The modern corporate organization faces a host of risks that can affect operational efficiency and regulatory compliance. Simple awareness is not enough to stay ahead of these risks. You must find ways to manage, mitigate, accept, or transfer these risks.

Here’s where enterprise risk management (ERM) comes in. It helps you manage, minimize, and in some cases eliminate risks, to keep your organization safe and in business.

There are many different types of risks, such as operational risks, financial risks, or strategic risks; as well as others including reputational, regulatory, or cybersecurity risk.

What is ERM?

Enterprise risk management is a holistic, disciplined approach to identifying, addressing, and managing an organization’s risks. ERM looks at risk management strategically and from an enterprise-wide perspective. Thus, it is a “top-down” methodology of risk management that calls for leadership-level decision-making.

With ERM, the responsibility of risk management isn’t placed on individual departments or business units. Instead, the organization’s leadership will assess teams from an enterprise-wide lens and set expectations accordingly.

This approach sets ERM apart from the “silo approach” of traditional risk management. In older risk management models, potential risk is handled by departments, with the heads of each department handling their own risk and managing their own risk response measures.

The issue with this approach is that sometimes risks fall outside of those defined silos, and some risks that are manageable for some departments might be catastrophic for others. An enterprise risk management framework will encourage communication throughout your entire company and assure that every risk is accounted for.

Why is ERM Important?

The importance of ERM is broad and far-reaching. A comprehensive ERM framework consolidates and improves risk reporting so you can identify key risks that may affect your organization, quantify and manage them better, and implement the proper controls to eliminate or reduce the threat. ERM can also improve human productivity, enhance customer relationships, and improve your compliance posture.

In many industries, ERM enables companies to understand the relationship between risk and value creation. An ERM program can improve your supply chain, so you can better plan your inventory and forecast customer demand, lower operational costs, and improve revenues. If your organization is in science or research, ERM can help you track risk throughout the entire lifecycle of a new product or project, protecting your work at all stages.

ERM also has financial benefits. Not only can an integrated risk management program save you money by avoiding business disruptions; it can also help your accounting team come audit time. It will also help you weigh your risks against your opportunities, allowing you to grow your company with greater peace of mind.

What Are the Components of Enterprise Risk Management?

ERM consists of eight interrelated steps based on senior management’s business decision-making and processes:

1. Objective Setting

   Before determining whether a risk should be accepted or denied, you need to assess your business goals. Management, in conjunction with the board of directors, must first establish the company’s mission and success metrics to ensure that those objectives align with the decided risk appetite.

2. Risk Assessment

   A risk assessment is the foundation of your ERM process. This systematic, step-by-step, process involves risk identification, evaluation, and prioritization. It also includes determining the likelihood and impact of each risk and analyzing your current security controls.

3. Risk Response

   Once you establish the risks that could potentially affect your organization, you need to align responses to your objectives. You can choose a strategy to avoid, accept, reduce, or share for each significant risk. It’s also crucial to document the steps to risk mitigation (the actions that will be taken to manage each risk.)

4. Internal Business Environment

   Your company culture and code of conduct will influence the way your employees deal with risks. The managerial skills of your leaders will drive a healthy risk-aware culture and assure that critical risks are never overlooked.

5. Event Identification

   After determining your risk tolerance and risk appetite, you must review any potential event that can prevent your company from meeting its goals and business objectives. Whether internal or external, all events must be classified as either opportunities or risks and then aligned to the overarching business strategy.

6. Control Activities

   Your risk response and event identification processes require the creation of robust controls: policies, procedures, roles, responsibilities, and other “checks and balances” to implement the quick and effective responses.

7. Information and Communication

   Employee training and education about risks will improve awareness beyond your leadership and compliance teams. Involving your employees in this process will help them make decisions that will reduce the organization’s risk exposure.

8. Monitoring

   ERM must be continuously monitored to stay on top of the evolving risk landscape through internal audits, external audits, and as a part of ongoing management activities.

RiskOptics ROAR Can Ease the ERM Burden

If you want to bring your risk management process into the 21st century, you won’t succeed using dated techniques like spreadsheets. ROAR is an integrated software platform that can help you create and sustain your ERM program.

The ROAR platform provides a single source of truth by aggregating all records, reports, policies, procedures, and control listing in one place. Its reporting tools provide easy-to-digest reports with graphics that clearly explain your risk profile and help you take the right actions to manage or minimize risk. It also streamlines the audit process, so you can save time and money and improve audit outcomes.

Schedule a demo to learn more about how ROAR can help your company establish an effective enterprise risk management program. Click here to get started.