Enterprise risk management is a structured and coordinated enterprise-wide governance approach to identify, quantify, respond to, and monitor the consequences of potential events. Implemented by management, ERM is evaluated by internal auditors concerning its effectiveness and efficiency.
The practice of managing risks, which is a key element of governance, has traditionally fallen to business units and/or parts of those units; and to a lesser extent, through the organization. Enterprise risk management (ERM) takes a broader approach and manages risks and opportunities that affect the creation or preservation of organizational value.
Business risk management is defined as a process carried out by the board of directors, management, and other personnel of an entity; applied in a strategic framework and throughout the company; designed to identify potential events that may affect the entity to manage risks that are within acceptable limits to provide reasonable assurance regarding the achievement of the entity’s objectives.
Everyone in the organization plays a role in ensuring successful enterprise-wide risk management, but management has the primary responsibility for identifying and managing risks and implementing ERM with a structured, consistent, and coordinated approach. The board of directors or its equivalent has overall responsibility for monitoring risks and obtaining assurance that they are managed within an acceptable level. Internal auditors, in both their assurance and consultative roles, contribute to risk management in a variety of ways. They play a role in evaluating the effectiveness of the ERM and in recommending improvements to it. The IIA Standards indicate that the scope of internal audit must include risk management and control systems.
It is imperative to be clear that a business that knows and manages risks wisely reduces the incidence of errors, mainly during the decision-making process, which leads to an optimization of both the quality and efficiency of the actions taken.
Thus, business risk management encompasses measures to prevent and confront events with great destructive potential that may affect the activity, performance, and profitability of a business.
5 objectives of risk management
Based on the concept, it is understandable that risk management is a sum of strategies crucial for business and that to provide efficient guidance it presents a series of objectives.
1. Prevent threats
By knowing the risks that can affect organizational success, the company can adopt preventive measures, and thus minimize their occurrence. Therefore, it manages to reduce the costs derived from its consequences and protect the business from a possible collapse.
2. Respond quickly to critical situations
The detection of sensitive points allows resources to be adopted and effective and rapid confrontation measures to be established in the face of harmful events.
Keep in mind that the ability to provide a quick response is closely linked to how you deal with the costs of corrective actions.
In this sense, it is crucial that the company prepares to solve the risks, which is possible when:
- Strategic business planning is brought to the fore.
- A budget is estimated.
- There is an emergency reserve that makes it possible to cover expenses.
3. Define risk levels in accordance with the peculiarities of the company
You must consider that the risks borne by an SME are not the same as those faced by a large company. This is because the risks considered acceptable are associated with the characteristics and financial structure of the organizations.
To detect risk levels within appropriate limits, it is essential to know the organization in-depth and understand to what extent it can face a certain situation. This analysis must be carried out considering avoidable and predictable risks.
By doing so, the risk manager in conjunction with other corporate leaders can establish how much the company can bet, as well as the decisions necessary to prevent threats from coming to fruition.
4. Reduce losses
So, to reduce losses, it is essential to carefully analyze the situations that you believe are minimal before putting them aside or eliminating them from the list of possible causes of misfortune.
5. Maximize the use of opportunities
The main purpose of risk management is to know in detail the events that may endanger the integrity and operation of the business.
However, you must consider that, by detecting these critical points and defining contingency actions, you open space for much more effective decision-making, in favor of compliance and aimed at taking advantage of the decent opportunities that arise.
In short, business risk management is a set of practices and strategies crucial for the success of a business, since it puts at the forefront the prevention of situations harmful to its reputation and helps to define a coping plan in case the threat has manifested.