Evolution of Enterprise Risk Management (ERM)
Risk management has actually been around for thousands of years. However, it has been only till a few decades ago that the concept of enterprise risk management has been formalized and used in business.
Fundamental theories and best practices of enterprise risk management were first observed in the insurance sector. Here significant activities revolved around managing risk and finances associated with those risks.
Risk management practices adopted by other industry types were termed with names like corporate risk, business risk and integrated risk management.
But that has all changed in the past few years as it become evident that managing enterprise risk is not only limited to insurance and financial activities. The function of a corporate risk officer in today’s scenario is to identify risks, profile them and establish controls and processes to mitigate those risks. By doing so this helps the organization achieve its objectives.
ERM has started gaining broader recognition and acceptance as corporate management has begun focusing on governance regulations and mitigating business risks. ERM in today’s world is directed towards:
- Meeting operational goals
- Eliminating gaps in the risk strategies employed
- Increasing the holistic view of a company’s organizational risk
Senior management is becoming increasingly unhappy with the quality of enterprise risk management programs and strategies. They want to introduce programs that are:
- More structured
- Easy to implement and manage
Change is always inevitable and this leads to lack of success if risk management tools and strategies are rigid, inflexible and traditional.
Business performance and improvement on a continuous basis is no longer a one-time requirement or function. A clearly defined enterprise risk management and compliance solution is essential. This provides visibility to the management and allows businesses to prioritize resources which are inevitably limited.
While implementing an efficient ERM solution, identifying risks, critical processes and establishing controls. Coupled with excellent monitoring/reporting and use of risk compliance software is a paramount requisite.
Though the process of establishing a strong ERM program may be cumbersome and time consuming, it eventually provides a system that wards off future possible risks and permits the management to concentrate on other vital and essential business goals and avoids unnecessary activities.