January 10, 2023
In any organization, risk is the primary source of uncertainty. The business environment is dynamic and ever-changing, as such, there is a need for all companies and its stakeholders to stay one step ahead of the uncertainties by adopting an all-inclusive and integrated mechanism of managing risks from identification, to control, to monitoring and reporting in a bid to minimize their intended impact on an organization. By establishing an Enterprise Risk Management (ERM) program, businesses can set themselves up to be resilient in the face of uncertainty. Employing a holistic approach to risk management is a prerequisite for building corporate resilience and achieving organizational efficiency. Due to how interrelated and rapidly emerging risks are nowadays, senior management and boards are obliged to commit considerably more time to risk management.
Enterprise Risk Management is a continuous process, traditionally driven by the firm’s board of directors, implemented by management and practiced by the employees, who are individually enabled to recognize, understand and manage risks in the performance of their assigned roles.
Thus, it may be noted that Enterprise Risk Management encompasses the full extent of the organization’s operations and is not restricted to a particular event or circumstance impacting the organization’s operations. it is a dynamic process that involves individuals at all levels, covers every area of the organization’s resources and operations, and creates a comprehensive image of the entire business. The stakes when managing risk are higher now than ever before.
As companies seek to grow organically or through strategic partnerships, their risk exposure extends as well. Without a comprehensive understanding of the specific risks and vulnerabilities that could threaten the organization’s overall business strategy, no Enterprise Risk Management program can succeed. This is why risk identification and a future-focused risk evaluation are the pertinent steps to allow a company to readily identify its key risks and subsequently assess the threat of each risk to the accomplishment of its goals.
In addition to a focus on internal and external threats, Enterprise Risk Management emphasizes the significance of managing positive risk. Positive risks are opportunities that could boost the business value or, alternatively, adversely impact an organization if not taken. Indeed, the aim of any ERM program is not to eliminate all risk but to preserve and add to enterprise value by making smart risk decisions thus achieving operational efficiency.
“The only thing constant in life is change.” The current business climate continues to validate this statement as new threats and opportunities put organizational operating models to the test. Events past and present such as the financial crisis, technological advances, a global pandemic, and environmental, social and governance issues are critical stepping stones for the continuous development of ERM.
ERM necessitates assessing the firm’s risk capacity and the determination of risk appetite to equip the Board of Directors to make an informed decision in setting objectives, evaluating options, and making a choice of strategy in pursuit of realizing the corporate vision. It seeks to strike the right balance between risk and return, with the considerations of risk capacity and risk appetite, at various activities and levels of the organization, across the company.
To build an effective Enterprise Risk Management framework or model, the ensuing components need to be developed: