A solid approach to enterprise risk management or ERM is essential for any organization to succeed in its ongoing business operations. ERM is typically a business strategy extended throughout the company to identify and manage risks to a company’s finances, operations, and objectives.
Identifying significant risks and implementing appropriate responses to these risks are the two fundamental aspects of enterprise risk management. These responses may include internal control procedures or other risk prevention activities like acceptance, tolerance, avoidance, termination, transference, and sharing of risks in terms of a joint venture or something similar.
Given the rate at which the global business environment is changing, the volume and complexity of risks affecting an enterprise are rapidly increasing. At the same time, boards of directors and senior executives are expected to provide more effective risk oversight. As a result, organizations may need to reconsider whether their risk management approach can manage risks affecting their overall strategic success proactively versus reactively.
Traditional ERM, which places decision-making in the hands of division heads, can result in decentralized evaluations that fail to take other divisions into account. As a result, businesses in industries such as aviation, construction, public health, international development, energy, finance, and insurance have started to acknowledge the need for a more holistic approach to ERM. Investors find ERM-friendly companies more appealing because they indicate more stable investments.
Efficient ERM is all about gaining greater awareness of the risks facing the organization and its ability to respond to them effectively. Tackling risks head-on enhances confidence about the achievement of strategic objectives. The end goal of ERM is to improve compliance with legal, regulatory and reporting requirements and to increase the efficiency and effectiveness of operations across businesses.