Enterprise risk management (ERM) has become very important. The recent global financial crisis has highlighted the importance of aligning performance management and risk management in protecting and creating shareholder value. If we look at a handful of business failures in the current financial crisis and the recent case of Kweku Adoboli, the UBS rogue trader accused of losing the Swiss Bank $2bn in unauthorised trades, there is no doubt that risk management is an important and growing area in the uncertain world.
In a white paper entitled Driving Business Performance with Enterprise Risk Management published by Open Pages, the leading provider of enterprise GRC management solutions that optimise business performance, the authors shed light on the effectiveness of ERM in improving organisational performance. Although the paper is an old read, it is worth reading even now.
Some of the key points worth noting from the paper include:
• The need for executive management and boards of directors to rethink their risk management strategies and better understand how risk is being managed in their businesses to improve business performance.
• The benefits of integrating risk management functions across other organisational functions. The recent global financial crisis has exposed the short comings of allowing risk management functions frequently operate in silos. Operating in silos results in poor outcomes and is also expensive due to its multiple, redundant data collection processes and duplicate technology infrastructures.
On the contrary, the benefits of integrating risk management silos include; improved efficiencies, reduced costs and improved transparency in the interdependencies of risks in the business.
• The need for management to adopt a risk-based approach to managing their businesses. This approach identifies the key business processes and associated risks and then allocates resources accordingly.
• Enterprise risk management and supporting technology solutions help organisations deal with business uncertainty and the associated risk and opportunity. Organisations are better placed to manage unexpected outcomes and reduce the impact of risk events when they do occur.
• The key to successful risk management is establishing an “ERM framework” for identifying, measuring, monitoring and managing risk. A comprehensive ERM program will:
1. Align the organisation’s risk appetite with. business objectives.
2. Identify and manage multiple and cross-enterprise risks.
3. Enhance and optimise the control environment.
4. Reduce the frequency and severity of operational surprises and losses.
5. Enhance the rigour of the organisation’s risk-response decisions.
6. Proactively seize on the opportunities presented to the organisation.
7. Improve the effectiveness of the organisation’s capital deployment.
When embedded into everyday processes at all levels of the organisation, risk management will drive business performance. ERM integrates risk management activities into the everyday business processes of the organisation, supports and influences pricing, resource allocation and other business decisions.
Source: Driving Business Performance with Enterprise Risk Management White Paper.