ERM: Getting Beyond Risk Identification to Sustainability

Key Highlights:

• Introduction – ERM Drivers & Trends:

  • External Drivers:

    • Pressure from key stakeholders, including debt holders, rating agencies, the investor community, and exchanges.

    • Corporate governance requirements and regulatory pressures, such as the Sarbanes-Oxley Act (SOX).

    • Adoption of frameworks like the COSO ERM framework and international risk management standards.

    • Influence from federal government initiatives and shareholder advocacy.

    • Increased demand for disclosure and transparency.

  • Internal Drivers:

    • A desire for a deeper understanding and quantification of strategic and operational risks.

    • Pressure from the Board and Audit Committee to comprehend the organization’s risk profile.

    • The need for improved decision-making and communication.

    • The necessity to demonstrate a continuous and sustainable ERM process and framework.

    • Limited tolerance for unexpected events.

    • A desire to align risk with strategy and key decision-making processes.

    • An aim to enhance the ability to identify, quantify, measure, and monitor risks across the organization.

• ERM Objectives:

  • Ensuring that risk issues are explicitly considered in decision-making processes.

  • Avoiding surprises and “predictable” failures.

  • Aligning risk exposures with mitigation programs.

  • Instituting more rigorous risk measurement practices.

  • Integrating ERM into other corporate practices, such as strategic planning.

• Benefits of Advanced ERM Implementation:

  • Companies with advanced ERM practices experience:

    • Better-informed decisions.

    • Greater management consensus.

    • Increased management accountability.

    • Smoother governance practices.

    • Enhanced ability to meet strategic goals.

    • Improved communication with the board.

    • Reduced earnings volatility.

    • Increased profitability.

    • Utilization of risk as a competitive tool.

    • Accurate risk-adjusted pricing.

• ERM Framework and Path to Sustainability:

  • The presentation outlines a structured approach to ERM, emphasizing the importance of:

    • Establishing a risk-aware culture.

    • Developing a comprehensive risk management framework.

    • Implementing effective risk identification, assessment, and mitigation processes.

    • Ensuring continuous monitoring and reporting of risks.

    • Integrating risk management into strategic and operational decision-making.

• Getting Started – Potential Approaches & Options:

  • The document suggests initial steps for organizations embarking on ERM implementation, including:

    • Conducting a business risk assessment to identify and prioritize risks.

    • Building a risk hierarchy to manage risks at appropriate organizational levels.

    • Performing risk quantification and analysis for key identified risks.

    • Developing risk management plans and strategies.

    • Establishing metrics to monitor risk management effectiveness.

• Success Drivers, Pitfalls, and Benefits:

  • Success in ERM implementation is driven by:

    • Strong leadership and commitment from top management.

    • Clear communication and a shared understanding of risk across the organization.

    • Integration of ERM into the organizational culture and business processes.

    • Continuous improvement and adaptation of the ERM framework.

  • Common pitfalls include:

    • Lack of clear ownership and accountability for risk management.

    • Inadequate resources allocated to ERM initiatives.

    • Failure to integrate ERM into strategic planning and decision-making.

    • Overlooking the importance of organizational culture in risk management.

  • The benefits of effective ERM include:

    • Enhanced decision-making capabilities.

    • Improved ability to achieve strategic objectives.

    • Increased organizational resilience and sustainability.

    • Better stakeholder confidence and trust.

This comprehensive presentation provides valuable insights into the drivers, benefits, and implementation strategies of Enterprise Risk Management, emphasizing the transition from mere risk identification to achieving sustainability through effective risk management practices.

Click for a link to presentation.

Citation: Chagares, M. & McCarthy, C. “ERM: Getting Beyond Risk Identification to Sustainability” ERM Initiative. May 20, 2005.