ERM Lessons, Trends, and Laws

February 26, 2004 ERM Initiative Staff 2-min. read

Key Highlights:

Definition of ERM: Enterprise Risk Management (ERM) is defined as a process, effected by an entity’s board of directors, management, and other personnel, applied in strategy setting and across the enterprise. It is designed to identify potential events that may affect the entity and manage risks within its risk appetite, providing reasonable assurance regarding the achievement of entity objectives.
Strategic Risks in Fortune 1000 Companies: A study of Fortune 1000 companies between 1993-1998 revealed that 10% experienced a loss of over 25% in shareholder value within a one-month period, primarily due to strategic risks.
ERM Process Framework: The presentation outlines the ERM process, which includes setting objectives, identifying risks, assessing risks, acting on risk responses, and monitoring.
Barriers to Strategy Execution: Four primary barriers are identified:
- Vision Barrier: Only 5% of the workforce understands the strategy.
- People Barrier: Only 25% of managers have goals or incentives linked to strategy.
- Management Barrier: 85% of executive teams spend less than one hour per month discussing long-term strategy.
- Resource Barrier: 60% of organizations don’t link budgets to strategy.
Risk Identification Techniques: Various techniques are discussed, including interviews, questionnaires, brainstorming, self-assessment workshops, SWOT analysis, benchmarking, and the use of risk consultants.
Business Risk Model: A common language for categorizing risks is presented, encompassing areas such as operations risk, compliance, financial risk, information processing/technology risk, and strategic risk.
ERM Implementation Examples: The presentation references companies like Wal-Mart and Canada Post, detailing their ERM processes and the importance of integrating risk management into strategic planning.
Trends in ERM Adoption: Data indicates varying levels of ERM framework implementation across regions, with European companies leading in adoption at 53%, followed by North American companies at 34%, and Asian companies at 33%.
Benefits of ERM: A significant percentage of executives believe that ERM can improve their price-to-earnings ratio and cost of capital, with 84% acknowledging a link between ERM and these financial metrics.
Legal and Regulatory Considerations: The presentation touches upon various laws and key documents influencing ERM, including the Turnbull Report in the UK, KonTraG in Germany, the King Report in South Africa, and the Sarbanes-Oxley Act in the United States.

This comprehensive presentation provides insights into the importance of ERM, common challenges in its implementation, and the evolving legal landscape influencing risk management practices globally.

Original Article Source: “ERM Lessons, Trends, and Laws” Paul L. Walker, ERM Initiative. Feb. 26, 2004.