What is Risk Management?
Every business engages in a certain level of risk. While risk provides opportunity, it can also result in disaster for your business (if it’s not properly managed). Enterprise Risk Management provides a framework for managing risk while providing opportunities that can result in growth.
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However, if you carry out risk management daily, it can become repetitive and essentially lose its importance. Don’t fall into the trap of taking risk management for granted. Properly managing risk will ensure operational stability, growth, and compliance with established regulations.
Defining (ERM) Enterprise Risk Management
Enterprise Risk Management is the blueprint that allows businesses to manage risk effectively. ERM is described by the (COSO) Committee of Sponsoring Organizations of the Treadway Commission as a way of handling uncertainty within the business environment while leveraging risk to create opportunities for growth.
ERM is essentially a sensitive balancing act that involves strategies aimed at minimizing potential threats, while at the same time creating a tolerant environment that can produce valuable growth opportunities.
Understanding COSO’s Risk Management Framework
A COSO ERM framework involves aligning your business’s risk appetite with a solid strategy that can prevent operational losses from strategic risks. This framework also includes risks that apply across departments and enterprises. With a holistic approach to the risks that your business faces, you can use company resources to balance risk appetite, identify new opportunities, and keep various stakeholders informed throughout the process.
The COSO ERM framework allows you to establish and maintain a comprehensive risk strategy. This involves identifying potential risks, accepting them, and deciding which ones to eliminate or mitigate.
Is ERM important for your business?
Enterprise risk management provides more than just growth opportunities for your business. It also allows you to develop a structure for governing your risk environment so you can remain compliant with various regulations. ERM provides a robust framework for continuous compliance. This means that your business will always remain on the right side of the law and you’ll minimize your risk of incurring fines and penalties.
ERM particularly enables your business to remain compliant with section 404 of the Sarbanes-Oxley Act (2002). How so? You can always develop a strategy for managing oversight and establishing efficient communication between departments to remain compliant. And because an ERM program extends beyond SOX compliance, you can develop broader controls for proper organizational reporting.
The eight components of Enterprise Risk Management
Many businesses looking to establish a risk management plan wonder what ERM involves. To get a holistic overview of ERM, you need to understand all the eight components that form the foundation of an enterprise risk management plan.
1. Setting relevant objectives
The goals of your business will determine how you classify risks, and which ones will be channeled into opportunities for the company. Align your risk classification with your overall business objectives.
2. Assessing risk
The next step is to evaluate each type of risks and its potential impact on your business. This will involve analyzing the threat, how it aligns with your goals, and how you can approach this risk to benefit your business. This typically involves investigating tools and services the business uses and any risk associated with them.
3. Responding to identified risks
For every analyzed risk, you need to determine how you can approach it. You will have the choice to accept, avoid, share, or mitigate the risk. Establish a framework for making these decisions and make sure that everyone in the organization is on-board.
4. Creating an internal environment for risk approach
Risk management is not just the responsibility of the management team and other decision makers. How your business approaches risk is an internal environment issue, and it involves all your employees. You will have to set a tone for risk appetite in the business, after which the strategy will impact how your entire business approaches each risk.
5. Developing a framework for identifying and classifying risk
The next step to approaching risk is establishing a framework for event identification. This means narrowing down your overall risk strategy to specific events, and how those events will be approached. Both internal and external events need to be appropriately classified to establish a guiding principle for the entire business.
6. Establishing relevant controls
Most importantly, you should have a set of policies and procedures that govern how risk is approached in your business. Controls ensure that everyone is on the same page with regards to risk approach.
7. Determining the flow of information
Risk management could be ineffective without an efficient channel of communication. This channel should allow all relevant information to flow freely to all the involved parties as necessary.
8. Continuous monitoring
A continuous monitoring framework is critical because it allows your business to adjust to emergent risks and to maintain up-to-date audits of all previous risks.
Ken Lynch is an enterprise software startup veteran, who has always been fascinated about what drives workers to work and how to make work more engaging. Ken founded Reciprocity to pursue just that. He has propelled Reciprocity’s success with this mission-based goal of engaging employees with the governance, risk, and compliance goals of their company in order to create more socially minded corporate citizens. Ken earned his BS in Computer Science and Electrical Engineering from MIT. Learn more at ReciprocityLabs.com.