This article, authored by William G. Shenkir and Paul L. Walker, notes that academic institutions face many of the same risks encountered by businesses, like the availability of funding or reputational risks.  The stakeholders of an academic institution include donors, government at all levels, faculty, students, parents and future employers.  The actions of key administrators, faculty or students can impact the institution’s future enrollment, reputation and future contributions.  While campus administrators cannot eliminate all of the risks facing their institutions, they can mitigate the impact of events more effectively with advance planning.  Implementing an ERM approach can help managers of academic institutions identify risks to the organization, estimate the impact of risk events and plan strategically to limit their effects.

Establishing an ERM Framework

For an ERM implementation to be successful, the organization must have clearly defined its strategies and objectives so that potential risks to achieving those objectives can be identified.  Risks may be identified using techniques like brainstorming, interviews, self-assessments, risk questionnaires or facilitated workshops.  Studying the loss-event data of other academic institutions or firms in the private sector may identify risks that were overlooked using other techniques.

Risk assessment is a process of estimating the financial impact and likelihood of an identified risk to the organization’s objectives.  Risks with a high impact and likelihood require management attention and a mitigation plan, while those risks with a low impact and likelihood may require no further action.  Managers may find that they are incurring excessive expenses to control risks with a low likelihood and financial impact, which could lead to cost savings by streamlining risk mitigation efforts.  Risks with a moderate probability and impact, or a low probability and high impact, should be monitored by the institution.

For ERM to be effective, administrators cannot allow individual units to expose the institution to excessive risks or overly manage smaller risks.  The board and executive management must make decisions about the institution’s risk appetite and communicate risks tolerances to leadership within the institution.  Risk information should be communicated upstream to senior management by risk owners so that appropriate monitoring and mitigation strategies can be established.

ERM Challenges for Academic Institutions

Academic institutions face financial risks related to government funding, enrollment, contributions and the financial performance of endowment funds.  Reputation risk is a major risk for academic institutions that can impact enrollment and funding.  Violence on campus is an example of a low probability, high impact risk event that can significantly impact an institution’s reputation.  Academic institutions also face challenges recruiting and retaining quality administrators and faculty.  The risks associated with turnover can be mitigated by recruitment efforts and succession planning.

Academic institutions may be governed by board members who are not appointed based on their ability to monitor risk and provide governance.  Many board appointees are selected because of their political connections or capacity as donors.  Under the best conditions, boards cannot effectively monitor and govern the institution’s risks if they are not identified and assessed.  Academic institutions will benefit from an ERM approach to risk assessment and monitoring that compiles information about the organization’s biggest risks and facilitates strategic planning and risk mitigation.

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Link: William G. Shenkir and Paul L. Walker, Ensemble Performance, Business Officer, December 2008.

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ERM Enterprise Risk Management Initiative 2008-12-01