Enterprise risk management (ERM) can be a challenging endeavor – but a rewarding one, too. While the benefits uncovered by effective ERM don’t always add to the balance sheet directly, they do help a company’s resilience in the face of approaching dangers.
That said, numerous barriers to effective ERM can exist within a corporate organization. To reap the full benefits, risk management teams must understand what those barriers are, and the techniques you can use to overcome them. Then the company can move forward with its business objectives more confidently, knowing that the risks to those objectives are being kept in check in a disciplined, rigorous way.
Common Barriers to Risk Management
The barriers to effective risk management processes are not insurmountable. Simply being aware of them is the first step to overcoming them.
Communication among teams, departments, and organizations is difficult, and can be poor or non-existent in certain businesses. This can occur for various reasons, including competitiveness, poor relationships, and lack of coordination.
Poor communication can prevent critical information from reaching people who need it for decision-making and effective risk management. Things may go wrong because the appropriate personnel aren’t aware of particularly dangerous risks, such as underground electrical lines at a construction site or that a patient requires a specific medication.
Also, risk managers communicate the risk position of the firm to senior management and the board. Decision-makers use this information to define the firm’s risk strategy. If a chief risk officer (CRO) cannot communicate this information well, senior management may make bad decisions or develop an inaccurate perception of the risk position of the firm.
A corporate culture focused on business priorities over critical risks is a massive challenge for risk management practices. When CROs underestimate the probability or magnitude of risk events, that leads to insufficient or misallocated resources in the ERM program. Key risks must be prioritized correctly, or the ERM program will be marginalized and the company will be blind to the dangers it faces.
Inadequate Training and Supervision
The goal of training is to provide employees with the necessary skills to accomplish their jobs. In addition, supervision provides direction for planning, supporting, correcting wrong behavior, and leading by example.
Training and supervision are also risk management and mitigation activities. For example, training aids in the prevention of errors, while supervision reinforces performance and assures that the work is done correctly.
Both, however, have a price tag attached to them. In difficult times, training budgets and middle-managers are sometimes eliminated. It’s no surprise that things are more likely to go wrong when employees lack the necessary skills and no one is supervising them.
Failure to Use Appropriate Risk Metrics
Value at risk (VaR) is a popular risk metric, but it can only tell us the most significant loss the company expects to suffer at a given confidence level. The application of VaR doesn’t guarantee the success of risk management.
In addition, the effectiveness of the VaR application also depends on liquidity in financial services. If the market is illiquid, the metrics lose their meaning. For example, suppose a company is sitting on a portfolio that you cannot trade. In that case, the daily VaR measure is not a proper measure of portfolio risk because the company is stuck with the portfolio for a longer time period.
The pandemic drove the adoption of new technologies, and many companies had to recognize that they could no longer manage their ERM programs with spreadsheets and primitive solutions. As a result, systems and process deficiencies emerged in some areas, such as cybersecurity and third-party governance.
As companies adapt their approach to risk management, there will be significant changes in the execution of risk management. For example, we’ll see initiatives to improve data quality, increased automation, and more sophisticated use of technology and artificial intelligence to manage risk.
How Can Businesses Avoid Barriers to Risk Management?
Organizations that work to achieve common risk assessment objectives and overcome barriers are more likely to thrive in the modern business landscape. Here are some best practices businesses can apply to overcome those barriers.
Organizational Risk Culture
A corporate culture that doesn’t take risk seriously will paralyze your ERM program – and ultimately your organizational decision-making, too. A robust risk culture originates at the board of directors and senior executives, flowing down to employees at all levels.
Vigilance is accelerated through a diligent performance of assigned daily activities. These practices help implement risk management by enabling skilled resources to alert the company to any imminent threat.
Reliable risk assessment software creates a competitive advantage by offering critical information for better decision making. Furthermore, technical support from a technology vendor assures that the solution is cost-effective and easy to implement, allowing businesses to focus on growth and regulatory compliance.
Effective Risk Approach
Organizations often try to avoid risk assessments because from afar, the exercise looks daunting. Instead of getting overwhelmed and ignoring the challenge, companies can adopt a simple strategy and follow it diligently to identify risks. It is better to start small and be consistent than to do nothing.
Achieve Regulatory Compliance
Overcoming the usual obstacles to effective risk management means viewing regulatory requirements as practices contributing to overall business objectives. Financial penalties, reputational loss, and firm closures can all be avoided by adhering to regulatory compliance in today’s risky world.
Companies fail when they try to meet compliance obligations with a “check-the-box” mentality, without regard for the inherent value of the compliance regulations. Successful firms integrate regulatory compliance into their ERM program to maximize the benefits of risk assessments and compliance requirements for risk avoidance and mitigation.
Implement an Enterprise Risk Management Framework
The Committee of Sponsoring Organizations (COSO) offers a comprehensive ERM framework to help you overcome risk management hurdles.
Like COSO, the International Organization for Standardization (ISO) also has a framework that contributes to risk management. It focuses on identifying opportunities and threats and allocating resources to address risks.
In addition, you can implement corporate governance, risk management, and compliance (GRC) software to track and automate many of your risk management tasks. GRC software can map internal controls to various framework and regulatory standards to monitor and prove compliance.
Include ZenGRC in Your Risk Management Plans
ZenGRC‘s corporate governance, risk management, and compliance software offers an integrated solution. Procedures are revision-controlled and easy to find in the document repository. Workflow features enable easy tracking, automated reminders, and audit trails. Insightful reporting and dashboards provide visibility to gaps and high-risk areas.
Instead of using spreadsheets to manage your compliance requirements, adopt ZenGRC to streamline risk assessments and audit management for all your compliance frameworks. It is a single source of truth that assures your organization is always audit-ready.
Our risk software heat maps illustrate your organization’s low, medium, and high-risk regions in a user-friendly, color-coded dashboard, allowing you to take action quickly and share the results with your senior executives and board of directors.
Worry-free risk management is the Zen way! Contact us for a free demo of ZenGRC.