Enterprise Risk Management
Introduction
Risk management is the projection of challenges and setting ways in which companies can manage them. These risks may stem from legal liabilities, natural disasters, accidents, and mismanagement. Risk management’s steps vary according to the level of the company, that is, a global scale, regionally or locally. Identification and analysis of risks, the examination of feasible techniques for risk management, selection of the best possible solution, implementation of the chosen strategy, and monitoring of the results are the primal steps in risk management (Cican Simona-Iulia, 2014). Industrialization and development have increased the potential risks to organizations, which prompted two strategies that have evolved. These strategies comprise of enterprise (ERM) and traditional risk management (TRM). Firms adopted TRM at first and later changed to ERM as it compliments current technology advancement by being more accurate in risk projections. Therefore, ERM is mostly implemented by organizations for its comprehensiveness and the sense of collective responsibility it demands.
Differences
Traditional risk management was the first strategy to be employed to curb the rising challenges of organizations. The main principle of TRM is to deal with the current risk to reduce any exposures of losses or eliminate the threats. TRM gets characterised by using the following pointers; identification of the risk, analysis of the level of exposure through qualitative and quantitative analysis, control of risk from prospective and retrospective projections, financial aid from the management for risk containment, and monitoring of data flow and results of implementation.
When using the TRM strategy, the company allocates the risks to the respective department. TRM has satisfactory results as the process is independent, and the company can optimize its problem-solving capacity by delegating the risks to the relevant fields. Simplicity, pragmatism, and ease of comprehension are the requirements of the solutions making the implementation effortless and poses a possible short period for the risk to get contained. The assignment of threats to their particular departments has made it easy for the management to allocate the specified financial support. The team achieves a high level of accountability.
ERM is the current tactic to risk management that has revolutionized traditional control through comprehensiveness and strategy. The procedure of ERM is somewhat similar to the necessary steps of risk management. Which includes; risk assessment, which encompasses risk identification, description, analysis, and expressing, risk reporting is the next step that descriptively explains the threats and possible opportunities, decisions of the risks follows, potential risks treatments get drawn, residual risk reporting. Finally, the monitoring of results gets conducted for a review of the success of risk management.
The company’s objectives, vision, and mission statements dictate the types of risks the organization is likely to experience, and a risk management team gets formed to curb all the risks from the various aspects, unlike the TRM strategy. The majority of organizations prefer using the ERM procedure to identify threats and possible losses, which then uses them as opportunities for business expansion. Through efficient assessment of risks or dangers, there is the proper allocation of capital to the earning-generated opportunities.
Why enterprise risk management is a more effective
According to Cican Simona-Iulia (2014), TRM got improved to ERM, which showed to be more efficient due to several reasons. An advantage of ERM over TRM is that it is systematic and constant. ERM uses the concept of two heads being better than one to handle all the risks as a company and not decentralize to various departments; this reinforces coordination and optimizes risk evaluation monitoring. By the use of this ideology invites a diversity of ideas, and team-building exercises, improving the efficiency of risk containment and sufficiency of the information.
According to Acharyya (2008), the other reason why ERM is preferred is its correlation of risks to profitability, unlike TRM, which links risks directly to losses and threat sources. When a company employs an ERM strategy, the evaluation process involves analyzing the dangers to perceive them as entrepreneurial-generating opportunities to maximize the firm’s capital. For instance, any results from insurance companies’ research and development programs have given rise to new policies to create a new market, prompting more profits.
ERM also has a process to address critical risks. TRM projects on the potential challenges the organization may face and invests its resources on the specific identified risk. At the same time, ERM focuses on the possible threats based on the company’s objectives, vision, and mission, which is more vital and more likely to affect the company’s revenue. Optimizing resources on the essential risks facilitate time management and reduces the chances of loss.
Key drivers
According to Lee (2018), companies take several steps to ensure that risks get adequately identified and managed. Some of these steps include risk management strategies that involve decisions on the objectives, approaches, and priorities of the policy chosen. The plan should also comprise the roles and competencies required for its fulfillment, which is essential during delegation and work coordination. Besides, if any tasks should get outsourced, the relevant functions or proficiencies should be documented.
Another key driver is risk ownership, which is often allocated by the organization to one responsible member of the team. The risk owner is simply a representation of the risk management team who is ultimately one who accounts for the progress of the group, acts as a link between the administration and the team, and coordinates the daily activities. The risk owner conducts the delegation of roles and overseeing of the procedure; however, the risk owner does not monitor the outcome.
Decision making is another key driver. Every risk management effort is an implementation of the board meeting conducted at the beginning of each financial year. For the success of risk management policies implementation, a representative from the relevant team should be present, which helps in understanding the risk’s tolerance and the capacity to which the company will be exposed financially.
The daily operations recording is also a vital value-driver. For efficient and effective execution of the chosen strategy, daily documentation of the progress shows accountability. The daily records should involve reports of essential procedures of primary processes, regular financial statements, critical risk and control indicators, and day-to-day operating budgets from the risk owner.
Periodic monitoring is critical and a significant driver that helps the company to remain objective in mitigating the risk. An independent individual, who is often outsourced by the company, monitors the process to avoid favoritism. The auditor is usually on a direct line with the board to smoothly report the progress. The link and collaboration between the risk management team and the auditor are critical. For a better understanding of crucial risk parts, the auditor should be fully involved and informed.
The board and culture oversight that comprises of creating policies and guidelines that fashion an environment that facilitates objectivity is another key driver. The board takes responsibility for the risk governance by introducing a committee that surveys the management identification, mitigation, and compliance of the financial risks. Some companies employ independent boards that ensure periodic monitoring, and relevant reports get submitted for transparency purposes.
Key Driver Application Within Healthcare
The TRM strategy was used in the healthcare system and covered the health workers’ risks, but it later evolved to ERM, which is more comprehensive covering even the patients treated. The culture and board oversight are key drivers since they encompass all the health workers to the top. ERM is an ongoing procedure as new risks emerge daily, and therefore the culture should be embraced to ensure its success. However, the health workers alone cannot sustain the ERM. The management ought to get involved in financial support and policies implemented to ensure a smooth run.
Monitoring as a critical driver calls for competency and compliance of the health workers and prompts safety for the patients. Periodic monitoring drives a sense of obligation to the health workers and helps them to remain objective to their various responsibilities. The appropriate boards set aside to assess reports should be prompt to address deficiencies, deviations, and non-compliance.
Conclusion
The advancement in technology has resulted in a more accurate projection of risks and appropriate management strategies. It would be more logical to use ERM that is more specific in dealing with the critical risks based on the company’s purpose and, in turn, profitable when an opportunity gets conceived from an initially perceived risk. Though TRM can be applicable, the procedure will not be cost-effective, therefore going for a better option.
References
Acharyya, M. (2008). In measuring the benefits of enterprise risk management in insurance: An integration of economic value added and balanced score card approaches. Society of Actuaries, Working paper.
Cican Simona-Iulia , C. (2014). COMPARATIVE STUDY BETWEEN TRADITIONAL AND ENTERPRISE RISK MANAGEMENT – A THEORETICAL APPROACH . COMPARATIVE STUDY BETWEEN TRADITIONAL AND ENTERPRISE RISK MANAGEMENT – A THEORETICAL APPROACH , 1, 276–282. Retrieved from http://steconomiceuoradea.ro/anale/volume/2014/n1/029.pdf
Lee, D. (2018). Eight drivers of an effective enterprise risk management system. Eight Drivers of an Effective Enterprise Risk Management System, 1, 0–1. Retrieved from https://www.rsm.global/singapore/insights/our-expert-insights/eight-drivers-effective-enterprise-risk-management-system
Riskonnect , R. (2017). 5 Ways Integrated ERM Creates Value for Healthcare Organizations. 5 Ways Integrated ERM Creates Value for Healthcare Organizations, 1, 1. Retrieved from https://riskonnect.com/healthcare/5-ways-integrated-erm-creates-value-healthcare-organizations/