Enterprise risk management (ERM) is critical for success in the modern business landscape. Your ERM program should encompass all aspects of risk management and response in all business processes, including cybersecurity, finance, human resources, risk management audit, privacy, compliance, and natural disasters. The result should be better, more strategic decision-making.
ERM is the process of methodically identifying and dealing with any potential events that could threaten the achievement of strategic objectives or competitive advantage opportunities.
The two fundamental components of ERM are (1) the evaluation of significant risks, followed by (2) application of adequate responses. Those responses to risk include:
- Acceptance of a risk
- Prevention or termination of a risk
- Passing or sharing the risk via insurance, joint venture, or another arrangement
- Mitigating or reducing the risk by internal controls or other risk-prevention measures
Other ERM components are risk philosophy or strategy, risk culture, risk tolerance, and risk appetite. These components are expressions of the organization’s approach to risk in the enterprise and the quantity of risk the business is prepared to bear.
Risk reporting is a methodology for reviewing risks associated with an organization’s current and future business processes. The recognized risks are usually summarized in a standard risk report and delivered to the senior management team of an organization or several management units across the organization.
Two ERM Must-Haves
Two essential components of an effective enterprise risk management program are (1) a dedicated team to develop and implement the program; and (2) an ERM framework to guide that team through the process.
A good enterprise risk management program includes people from various functions. It involves executives, senior management, board members, and other stakeholders, to avoid decision-making in silos. This team will work together, often using an ERM framework such as:
- The Committee of Sponsoring Organizations (COSO) risk management framework helps establish industry-respected controls and suggests data support decisions.
- Operationally Critical Threat, Asset, and Vulnerability Evaluation (OCTAVE), developed by Carnegie Mellon University, provides a self-directed methodology customizable to your organization’s size.
- Factor Analysis of Information Risk (FAIR) provides a common risk mitigation vocabulary to help you to address security practice weaknesses.
- The National Institute of Standards and Technology’s Risk Management Framework (NIST RMF) details strategies for selecting initial controls and risk assessment methods.
- ISO 31000: Risk Management, from the International Organization for Standardization, is complete with principles, a framework, and a process for managing risk. Any organization can benefit from ISO 31000 regardless of size, activity, or sector.
Using an established framework can help to streamline the complex ERM process, avoid unnecessary risk exposures, minimize losses, and heighten your enterprise’s competitive advantage in the marketplace. Comprehensive governance and compliance risk management software can lead you step-by-step through your framework of choice.
ERM’s Ultimate Objective
When establishing an ERM program, risk mitigation is a paramount concern. Risk mitigation requires assessing all your organization’s strategic, compliance, operational, reputational, and financial risks – and then implementing controls to prevent these identified risks from harming your business.
If you approach ERM in your strategic planning process with specific goals, you’ll improve your chances of success.
What Are the Steps of ERM?
Here are five steps for setting up and running an ERM program.
Step 1: Establish Organizational Objectives
First your organization must determine its business goals.
When you set your organizational objectives, review your current risks and potential risks from new revenue streams.
For example, a company focusing on payment systems may comply with the PCI DSS standard to secure credit card information. But if that same organization decides to increase profitability by entering the healthcare industry, it must also review its HIPAA regulatory compliance.
As your organization grows, its risks will change. Understanding organizational objectives before assessing risks increases the value of the risk mitigation process, just as knowing the different paths to winning a game allows players to make better choices.
Step 2: Assess the Risks
A critical step in any ERM program is an assessment of your enterprise’s vulnerabilities.
Risk assessment starts with reviewing assets. Your financial, customer, physical, employee, supplier, and organizational assets determine what you need to protect and how to protect it.
After reviewing your assets, you need to perform a risk analysis to examine how opponents can exploit them, or how random circumstances can harm them. For example, your supply chain may present weaknesses that could cause damage to your operations or reputation. To strengthen your risk management, you must recognize ways that opponents (or malicious attackers) can use even your best defenses to their advantage.
Step 3: Determine Risk Acceptance or Risk Avoidance
After a risk assessment, risk management teams must then decide whether to accept or avoid the risk.
When reviewing your IT landscape, look at the internal controls in place to accept or avoid risks based on your risk assessment and assets.
For example, many consider Amazon Web Services (AWS) a safe cloud service provider (CSP). Attackers, however, increasingly target AWS, leading to DDoS (distributed denial of service) attacks and data breaches. Even after recognizing the vulnerabilities associated with AWS, an enterprise may still determine that AWS’s protections outweigh the weaknesses and accept the risks of using the platform.
Step 4: Map Internal and External Risks
Organizations must engage in the same analysis when mapping internal and external risks. Mapping internal and external risks throughout your enterprise can give you valuable insights into where and how those risks might intersect.
For example, the finance team might have elaborate financial projections to help determine the proper amount of cash reserves to keep on hand. Your suppliers, however, might suddenly experience some shock: bankruptcy, shipping delays, or higher materials costs. That external risk from suppliers might affect internal risks to cash flows and reserves.
Mapping those connections and consequences allows management teams to understand where risks might spring from and how to address those issues more effectively and efficiently.
Step 5: Set Controls and KRIs
It’s critical to monitor risks and metrics continue to remain compliant with regulations and frameworks. That means you must implement internal controls to keep risks in check. Key risk indicators (KRIs) can alert managers when those risks approach unacceptable levels.
When Kris drifts into “the red zone,” that could mean either a control has stopped working or that the underlying risk has changed, leaving the control ineffective. Controls and KRIs serve as an early-warning system to alert managers that something in the risk management program needs attention.
Key Elements of Enterprise Risk Management
ERM follows a well-defined and continuous process where it identifies and reassesses the different strategic and critical risks to guarantee the companies’ financial security. The method includes five specific elements:
Strategy and Objective Setting
From a high level, insight into the strategies and related risks of the company help set objectives and goals.
Identifying risks outlines the significant threats that can harm the company’s overall finances and security posture.
Identified risks are analyzed to assess both their likelihood and hazard potential.
Consider various risk coping strategies and choose suitable paths of action to realign the recognized risks with management’s risk tolerances.
Communication and Monitoring
Appropriate information and data must constantly be monitored and exchanged at all organizational levels.
How Do You Mitigate Corporate Risk?
To effectively limit your company’s risk and assure that your approach is flexible and comprehensive enough to cover the full range of risk factors, you need to:
- Understand the different types of risk and prioritize them
- Conduct a risk assessment to identify the risk factors most likely to affect your business
- Measure the potential impact of each threat and rank it accordingly
- Develop contingency plans
- Implement a quality assurance program
- Establish protocols to monitor risk levels at all times
Manage ERM with ZenRisk
The Reciprocity ZenRisk platform gives you one-touch insights into the effectiveness of your risk mitigation strategies.
Our risk heat maps provide user-friendly, color-coded dashboards showing high, low, and medium risk areas within your organization – dashboards shareable with your board of directors, senior management, and other stakeholders.
ZenRisk also helps your organization to organize its risk mitigation strategies right away. Workflow management features offer easy tracking, automated reminders, and audit trails. The ZenConnect feature allows integration with popular tools like Jira, ServiceNow, and Slack, ensuring seamless adoption across your enterprise.
Our powerful software offers templates and built-in content with more than a dozen compliance frameworks and standards to help you map your risks and controls. It highlights gaps and provides guidance on how to fix them.
Schedule a demo to see how ZenRisk can help you implement an integrated risk management program.