Introduction Promotes Strategies That Help Institutions ✓ Solved

Introductionerm Promotes Strategies Which Help Institutions To

ERM promotes strategies which help institutions to manage their risk holistically. ERM is not a separate risk discipline; it is the governance structure that provides the horizontal view of the risk disciplines and operational risks of an institution. It is better viewed as the risk arising from the execution of an institution’s business functions. Breach of any of those functions or failure to execute effectively may lead to an institution’s reputational loss and risk in operations.

Organizations should have long practiced various parts of what has come to be called enterprise risk management. Identifying and prioritizing risk either by foresight or following a disaster has long been a standard management strategy. Although practices have not progressed uniformly through different organizations and industries, the general evolution of ERM is characterized by different driving forces. Enterprise risk management assists management with the alignment of risk appetite and corporate strategy and improves the process for risk identification, measurement, and management, enhancing the ability to seize opportunities. All companies should have some form of risk management activities in place.

However, all these activities might be at best informal and at worst totally undocumented, uncoordinated, and misaligned with the overall strategy. Greater transparency into how a company manages its risk is being demanded by board members, senior management, and regulatory bodies.

The overall business strategy of a company should be broken down into its components, and each one examined to identify exposures to each major risk category such as Credit, Market, Operational, Legal, Financial, and IT. An assessment should be in place for existing risk mitigation techniques, or monitoring activities should also be performed at this stage. The requirements for this part of the exercise can be obtained through Risk Committee meetings, facilitated workshops, interviews, and surveys. It’s important to monitor progress and communicate the status of the ERM process throughout the organization.

Reporting should be simple, clear, and concise, and the formats should be tailored to specific users. The types of reports can range from simple lists displaying details of the top risks in rank order, graphical reports with high-level details, detailed reports that monitor and track the implementation of action plans, drill-down reports that display, for example, the Category, Ranking, Appetite, Control, Current Risk Assessment Result, Risk Owner, and Associated Action Plan for each risk, to progress reports that compare the actual results and benefits of the ERM initiative with original objectives.

Risk management is a process that is underpinned by a set of principles, and it needs to be supported by a specific structure that is appropriate to the organization and its external environment or context. A successful risk management initiative should be proportionate to the level of risk in the organization, aligned with other corporate activities, and dynamic by being responsive to changing circumstances. This risk management approach will enable an initiative to deliver outputs, including compliance with applicable governance requirements, assurance to stakeholders regarding the management of risk, and improved decision-making.

The impacts associated with these outputs include more efficient operations, effective tactics, and an efficacious strategy. These benefits need to be measurable and sustainable. An important part of analyzing a risk is to determine the nature, source, or type of impact of the risk. Evaluation of risks may be enhanced by the use of a risk classification system. Risk classification systems are important to enable an organization to identify accumulations of similar risks.

A risk classification system will also enable an organization to identify which strategies, tactics, and operations are most vulnerable. Risk classification systems are defined based on the division of risks into those related to financial control, operational efficiency, reputational exposure, and commercial activities. So far, there is no risk classification system that is universally applicable to all types of organizations and industries.

After completing the initial ERM process, this does not mark the end of the initiative, but the start of an ongoing process that will become part of the very fabric of the business. Having identified the top risks and put in place strong risk management controls to safeguard the company, it is now time to move on to the next stage. Support our growth drivers of creating life-enhancing innovation, delivering excellence in execution, and generating value through partnerships while empowering and inspiring our employees.

Risk management must be integrated into the culture of the organization, which will include mandates, leadership, and commitment from the Board. It must translate risk strategy into tactical and operational objectives and assign risk management responsibilities throughout the organization. Achieve a risk-aware culture by establishing an appropriate risk architecture, strategy, and protocols.

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Enterprise Risk Management (ERM) has become a pivotal approach for organizations seeking to mitigate risks while aligning their business strategies with a comprehensive risk management framework. This holistic strategy goes beyond merely addressing risks in isolation; rather, it integrates risk considerations into the overall governance structure of an organization. By taking a horizontal view of risk disciplines, ERM facilitates a cohesive response to both operational and strategic risks, ultimately enhancing an organization's resilience against unforeseen challenges.

The foundational aspects of ERM lie in its capacity to identify, assess, and prioritize risks systematically. This is crucial since organizations operate in increasingly complex environments where risks can emerge from multiple fronts, including financial, operational, legal, and reputational domains. For instance, credit risk arising from loan defaults, market risk associated with fluctuating commodity prices, or operational risks stemming from technological failures all necessitate meticulous scrutiny (COSO, 2017). As organizations develop their ERM frameworks, they should systematically dissect their business strategies, breaking them down into components to effectively identify potential exposures across these major risk categories.

To implement an effective ERM framework, organizations often engage in various activities such as risk committee meetings, facilitated workshops, and surveys to gain insights into their risk landscape. These exercises not only identify existing risk mitigation techniques but also provide a platform for communicating the status and progress of the ERM initiative across all levels of the organization (Akipeo Inc., 2018). Clear and concise reporting is vital, as it enhances transparency and promotes accountability within the organization. Risk reporting formats should be user-centric, ranging from high-level summaries to detailed progress reports that track the implementation of action plans and the efficacy of risk countermeasures.

A successful ERM initiative aligns with the organization's broader corporate strategy and should be adaptable to evolving circumstances. The principle of proportionality underlines that the risk management process must be commensurate with the risk exposures faced by the organization. This adaptability is essential in a landscape characterized by rapid changes, whether due to technological advancements, regulatory shifts, or market volatility. By fostering a culture of risk awareness, organizations not only comply with governance requirements but also empower their stakeholders to make informed decisions (CIMA, 2010).

One critical aspect of ERM is the establishment of a robust risk classification system. Such a system enables organizations to categorize their risks systematically, facilitating a deeper understanding of their cumulative exposure and vulnerabilities. While various classification systems exist, none have achieved universal applicability across all sectors. Thus, organizations must tailor their risk classification systems to their specific contexts, categorizing risks into financial, operational, commercial, and reputational domains to enable comprehensive analysis (Institute of Risk Management, 2017).

Moreover, integrating risk management into an organization's culture requires commitment and support from the executive level. Leadership must imbue risk management principles into the organization's strategic objectives and operational protocols to foster a risk-aware culture. By defining clear roles and responsibilities for risk management across all levels of the organization, from board members to operational staff, organizations can embed risk considerations into their daily functions, thereby aligning risk management with their vital growth drivers.

The implementation of ERM frameworks is not merely a compliance exercise; it offers substantial benefits, including enhanced operational efficiency and improved decision-making capabilities. The ability to measure and sustain these benefits is paramount as organizations strive for excellence in their risk management practices. It is imperative for organizations to remain vigilant, adjusting their ERM strategies as needed to respond to new risks that arise in their environments.

In conclusion, ERM presents a comprehensive approach for managing risk that requires commitment, strategic alignment, and adaptability. Organizations that effectively integrate ERM into their governance structures and overall corporate strategies will be better positioned to navigate complexities, capitalize on opportunities, and ultimately safeguard their long-term sustainability. As the business landscape continues to evolve, embracing a robust ERM framework will be critical to achieving operational excellence and maintaining a competitive edge.

References

• COSO (2017, June). “ERM: Integrating with Strategy and Performance.”
• Akipeo Inc. (2018, March). “The Financial Materiality of Environmental Risks in Food Production.”
• CIMA (2010). “Risk Management Report Warns Against Silo Mentality.” Insight. Incorporating Synergy.
• Institute of Risk Management. (2017). “A Risk Management Framework.”
• McKinsey & Company. (2020). “How to Build an Effective ERM Framework.”
• Kaplan, R. S., & Mikes, A. (2012). “Strategy and Risk Management.” Harvard Business Review.
• ISO 31000 (2018). “Risk Management Guidelines.”
• Beasley, M. S., Branson, B. C., & Dodge, R. (2018). “Enterprise Risk Management: An Examination of the Factors Affecting Implementation.” Journal of Risk Management.
• Fraser, J. R., & Simkins, B. J. (2016). “Enterprise Risk Management: Today's Leading Research and Best Practices for Tomorrow's Executives.”
• PwC (2019). “Risk Management and Internal Control: A Blueprint for Improvement.”