Integrating Enterprise Risk Management in the Organization’s Strategy
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Introduction
Enterprise risk management is defined as a tool to detect, assess, and counter risks that might challenge an entity’s operations (Lam 2014). According to Lam, an effective ERM should align with organizations’ overall plans, objectives, and strategies. Consequently, perfect ERM should be able to counter risks that deter the organization’s objectives and strategies. Additionally, the ERM should be able to counter all risks, physical or figurative. Hoyt and Liebenberg (2011) say that organizations should avail the ERM to all stakeholders, including the staff, the shareholders and all potential investors. Further, these ERM strategies should be included as part of annual reports. This paper shall discuss how to develop an integrate ERM with a company’s strategic plan.
Strategic Plan
Strategic planning is the first step towards developing an operational ERM. A strategic plan develops and defines how a company seeks to achieve its long term goals and objectives. Additionally, the strategic plan has to include risk management, and, particularly, strategic risks. The plan should consider threats such as competitors, technology development, market changes, product becoming obsolete, etc. Consequently, this plan will see how the business can continue adding value in light of these risks. It is vital for the plan to incorporate the risk parameter of the organization. A structured risk parameter defines the risk tolerance levels of business, including risk appetite and risk limits. Notably, some of the risks facing an organization are opportunities in disguise. A good plan should, therefore, be able to turn these risks into opportunities that the entity can exploit.
Strategic Risks
Identifying strategic risk is another crucial step to enterprise risk management. Further, the organization should be able to categorize different risks and develop a language for common across the whole entity. An entity must have different processes and techniques for managing these risks since they vary in terms of nature. Notably, strategic risks are different from business risks; thus, different techniques and tools must be used for identifying and assessing them. Though strategic risks are unique to an organization profile, there are common ones, including demographic changes, economic changes and trends, competitive dynamics, technological innovation, political and regulatory implications, and consumer behaviour changes.
Integrating ERM and Strategic Planning
Strategic risk assessment is more of a top-down process compared to business risk assessment. An entity must ensure that it exhaustively applies the tools and techniques for identifying, assessing, monitoring, and responding to strategic risks to ensure a comprehensive address. The first step to strategic risk management involves developing an organization risk profile. This refers to the articulation of an entity’s risk appetite and limits. The management must clearly state alongside the company’s strategic goal and objectives the risk parameters. Additionally, it is important to develop an effective risk identification process. Strategic risk identification follows a top-down approach with active participation from senior management.
Methods and techniques
Companies can use different risk assessment processes to evaluate their likelihood and impact. Possible techniques include fuzzy logic, decomposition, the preference among bets, testing biases, and Delphi techniques (Chapman 2011). Notably, strategic risks have gradual effects on a company’s wellbeing as opposed to business risks that might pose immediate financial or capital impacts. Therefore, triggers to strategic risk assessment should be factors such as emerging trends often identified using environmental scans. Scenario testing can be used to establish the outcomes of different scenarios in the case of strategic risk evaluation. Lastly, organizations should develop a monitoring and reporting framework for its strategic risks. This framework can be gradually updated to incorporate changes in the environment.
Enterprise Risk Management Framework
The component of an ERM framework is developing a common language around risk. The organization should strive to educate and familiarize its stakeholders with risk terminologies. It is important for staff to understand risk and related impacts such as business loss. Consequently, it is easier to communicate in one direction across the whole organization. The second component is the risk management committee that includes senior-level management. Members of this committee will include the board of management, senior management, business units, internal audit, support functions, and risk management (Moeller P. 2007).
After that, the roles and responsibilities for each committee member must be clearly stated. The board of directors should be accountable for all risks. Their primary task is to review and approve policies related to risk management periodically. Senior management is the party tasked with designing, implementing, and maintaining risk management policies. They should ensure that the company operates within its defined risk profile. Moving on, business units are tasked with identifying assessing, monitoring and controlling risks within their scope. They are tasked with continually providing the management with risk reports. Lastly, the internal audit is tasked with providing assurance on the functionality of the risk framework.
Another component is the enterprise risk methodology that comes next after establishing the committee responsibilities. It consists of key terminologies, roles and responsibilities, and procedures for risk identification, evaluation, monitoring, mitigating, and reporting. The other essential element of an ERM framework is risk appetite statements that outlines the firms’ capacity for risk. Risk identification is the next activity and component of the framework. It is a process consisting of four steps, including identifying acceptable risks, establishing the inherent risks level, assessing and ranking internal controls based on their capability, and, lastly, calculating the risk level. Thereafter the framework prioritizes risks as either high medium or low. This helps to develop another element which is risk-mitigating plans to respond to the identified threats. Lastly, the framework includes monitoring and reporting to ensure that enterprise risk management is a continuous process.
Issues and Challenges
Enterprise risk management is, however, a challenging process due to the complex nature of risk. A common challenge faced across organizations is defining risk: that is, establishing a consistent risk nomenclature across the organization. Risk assessment methods can also pose challenges as each of them contains unique drawbacks. While some methods are complex and require expert services, others are costly to the organization. Further, identifying risks and quantifying their potential effects is also a challenging process. Risk reporting can also be problematic when it comes to what should be included or omitted in the report. Additionally, formulating risk appetite statements can be challenging especially for entities with many shareholders. While some shareholders are risk-takers, others are risk-averse.
Conclusion
Enterprise Risk management is a strategic process that involves identifying, assessing, and mitigating risks that have potential threats to a firm’s strategic objectives and plans. A good ERM framework considers and incorporates the organization’s strategic plans. It ensures that the firm operates into the long-run despite constant threats. An effective ERM can overcome strategic risks, including market changes, technology changes, political and regulatory implications, etc. The ERM framework should be as exhaustive as possible, meaning that it should be comprehensive in terms of participation, technique application, assessment procedure etc. Nevertheless, ERM application is not an easy and streamlined process as there are various challenges due to the complex nature of risk. Nonetheless, it is imperative that all firms have an enterprise risk management strategy to ensure the long term survival of an entity.
Work Cited
Chapman, R. J. (2011). Simple tools and techniques for enterprise risk management (Vol. 553). John Wiley & Sons.
Hoyt, R. E., & Liebenberg, A. P. (2011). The value of enterprise risk management. Journal of risk and insurance, 78(4), 795-822.
Lam, J. (2014). Enterprise risk management: from incentives to controls. John Wiley & Sons.
Moeller, R. R. (2007). COSO enterprise risk management: understanding the new integrated ERM framework. John Wiley & Sons.