Every decision we make involves some sort of risk. How do we define an enterprise-level risk?
Table of contents:
Why is ERM becoming more prominent?
As technology becomes an indispensable part of running a business, different organizations are becoming more connected in cyberspace — both with each other, as well as their customers and clients.
This brings inherent risks to organizations both large and small — not only in terms of potential cyber-attacks but also loss of data and source code access. And in response, investors and regulatory bodies are increasingly mandating companies throughout many industries to scrutinize and report on the effectiveness and efficiency of their risk-management policies and procedures.
Modern businesses need an ERM mentality shift.
Many of the pitfalls of ERM stem from the culture within companies. Instead of treating the reduction of enterprise risks as something that needs to be approached systematically and strategically, most companies brush it off as an IT compliance obligation. Too often, the only times this is discussed is when a CTO discusses compliance issues in jargon-speak that nobody understands. Not surprisingly, this is part of the reason why it tends not to be seen as a strategic priority.
Such a mentality obfuscates and complicates ERM.
By its very nature, the key objective of enterprise risk management is to develop a holistic, top-down view of the most significant risks to the organization’s most important business objectives.
Given this objective, the responsibility for setting the tone and leadership for ERM resides with executive management and the board of directors. Not only are they the ones who have the enterprise view of the organization, but they are also viewed as being ultimately responsible for understanding, managing, and monitoring the most significant risks affecting the enterprise.
In 2020, companies can’t just aim to meet ERM standards as a check-all-the-boxes kind of thing. Decision-makers and leaders must prioritize overall risk reduction and boost visibility into the total security of the organization. This in turn will aid in catalyzing new, transparent dialogue surrounding ERM.
The good news, however, is that over the past decade or so, an ever-growing number of business leaders have realized that waiting until a risk event occurs is way too late for effectively addressing significant risks. They have also come to recognize and accept the shortcomings of the traditional approach to risk management on the enterprise level. And as a result, they are now increasingly and proactively embracing ERM as a business process to enhance how they manage risks to the enterprise.
What exactly comprises ERM and how does it work?
Top company management is responsible for designing and implementing the enterprise risk management process for the organization. They are the ones who have to determine what process should be in place and how it should function, and they are the ones ultimately tasked with keeping the process active.
The board of director’s role, on the other hand, is to provide risk oversight by approving management’s ERM process, as well as overseeing the risks identified by the ERM process to ensure management’s risk-taking actions are within the investors’ appetite for risk-taking.
Elements of ERM
Because risks constantly emerge and evolve, it is important to understand that ERM is an ongoing process rather than a project that has a beginning and an end.
Enterprise risk management practices center around planning, spearheading, and handling the ongoing operations of an organization. It’s done in a way that offsets the adverse effects that risk can have on your organization’s operations, capital, earnings, reputation, and other critical areas.
ERM should be integrated with business strategy in a way that its existence enhances the strategic value of the company. Having an effective risk management process should ultimately aid in executing the organization’s strategic objectives.
So here are a few key methods that help organizations bolster their ERM practices:
I. Establish a scope
- Define vital business processes and related risks
- Then, prioritize processes and risks
II. Define risks
- Figure out what threatens business objectives and strategies the most
- Disperse that information to the necessary individuals and establish protocols to mitigate those risks
III. Create an action plan
- Risk treatment plans will pinpoint unnecessary risks while closing risk gaps
IV. Use metrics get better insights
- Establish metrics and Key Risk Indicators (KRIs) to identify discrepancies and evaluate the success of your current strategy
V. Establish software escrow
- Modern, automated source code and data escrow can help you protect your mission-critical systems in case of unexpected events
So the question is: How do you minimize enterprise risk? Read about it in part 3!
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