Enterprise Risk Management Framework: A Guide to Growing Past Threats
An enterprise risk management framework is about more than adapting to risk. It helps you grow beyond the threats you face.
Modern risks aren’t static. Progress and innovation give businesses a lot more access to the tools they need to meet their goals, but the other edge of that opportunity harbors threats. In today’s rapidly evolving threat landscape, organizations face a myriad of risks, ranging from cyberattacks and data breaches that can compromise sensitive information to supply chain issues that disrupt business operations. Geopolitical uncertainties, regulatory changes, and the impacts of global events like pandemics further contribute to the complexity of the risk landscape. To tackle that, you need a flexible enterprise risk management framework (ERM). Your ERM process sets the tone for how you respond to all threats, so you can adapt swiftly and strategically while ensuring business continuity.
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Why You Need an Enterprise Risk Management Framework
An enterprise risk management framework is a flexible solution that goes beyond reacting to threats. Ideally, it empowers you to consistently meet business goals while overcoming challenges in your industry. An ERM provides a structured and adaptable set of guidelines for use in various scenarios. Here are some benefits of implementing a well-thought-out ERM framework.
- Proactivity: The worst time to establish a risk management plan is when you’re already facing a threat. That can feed into panic and lead to ineffective stopgap decisions. With a proactive approach, you position yourself to make informed and strategic choices, fostering resilience and minimizing risk exposures.
- Flexibility: The ERM framework is not built for a single, major threat. It incorporates all types of risk, whether you face a new data protection law or supplier disruption from a hurricane. The ERM framework guides all your overall business processes, making it suitable for all risk types.
- Resilience: Many risk management plans focus on weathering the storm, putting business goals on hold. For enterprises, the purpose of their operation is to provide value in the first place. If they’re unable to do that, the very core of their existence is compromised. Resilience in risk management means not just surviving challenges but also ensuring the continuous delivery of value, even in the face of adversity.
- Agility: Agility differs from flexibility by addressing the interconnected and cascading nature of risks. While flexibility involves adapting to the type of risk, agility is about responding to the unforeseen consequences and interdependencies that may arise from a specific scenario. For instance, in the case of natural disasters, agility means adapting to the initial impact and then swiftly shifting to secondary effects, such as power outages putting building security at risk.
- Rapid response: Quick and decisive action is the most valuable resource in any emergency, especially when employing risk mitigation strategies. Time is of the essence, and a rapid response not only lessens the immediate impact but also establishes a foundation for a more controlled and well-managed resolution in critical situations.
One of the clear benefits of adopting an ERM framework is its contribution to an effective risk management lifecycle. The key lies in having a well-established plan that can be followed and communicated consistently. Fortunately, there is ample guidance available for developing and implementing an effective ERM.
The Components of an ERM Framework From COSO Guidance
The Committee of Sponsoring Organizations of the Treadway Commission is considered one of the foremost experts on enterprise risk mitigation and management. In fact, they wrote the book on it.
The COSO is an established joint venture of five influential private sector organizations working collaboratively to enhance organizational performance and governance. Their notable contribution is the development of comprehensive frameworks. For COSO ERM processes, they published the Enterprise Risk Management—Integrated Framework, which has gone through several iterations.
This publication is several hundred pages long and encompasses a wide range of ERM strategies. However, for simplification purposes, it breaks its framework into a series of five broad categories:
Corporate governance and culture
Strategy and objective-setting
Performing the action plan
Review and revision
Communication and reporting
|This category covers establishing oversight and a risk-intelligent culture.
|Here, the business establishes its risk appetite and aligns its own strategies with business goals.
|Performance involves identifying and prioritizing key risks while implementing responses as necessary.
|In the review and revisions stage, the enterprise collects metrics on what was done wrong, what was done right, and what needs to change.
|Finally, the organization publishes an internal audit of its risk, communicates plans, and uses the information to improve responses.
Alternative Guidance from ISO 31000
Another commonly turned-to resource for risk management is ISO 31000. The International Organization for Standardization offers a comprehensive guide to risk management that can also be adapted to organizations of all sizes. This set of principles has a lot in common with the ones established by COSO, providing a globally recognized framework that emphasizes a systematic and integrated approach to managing risks.
Of course, as they are internationally recognized standards, both are extremely extensive. If you’d like something a bit more manageable that you can adapt to your organization, you can also use Alert Media’s risk mitigation template to start addressing the threats your enterprise faces.
Cultivating Risk Awareness From the Top Down
Risk intelligence is a key part of ERM frameworks because individuals can hold themselves responsible only for the threats they are aware of. Organizations must continuously gather information on these threats and communicate them to their team. Here are some methods for managing this.
- Conduct periodic risk assessments to identify and analyze potential threats, evaluating both internal and external factors impacting the organization.
- Implement monitoring systems and tools to track changes in the business environment, industry trends, and emerging risks. Automated tools and real-time data collection can be particularly valuable for highly regulated industries.
- Establish a robust incident reporting system for employees to report potential threats, and consider adding anonymous options to encourage a culture of openness without fear of retribution.
- Leverage external intelligence sources, such as threat intelligence services, industry reports, and regulatory updates, to stay informed about evolving risks that may affect the organization.
- Establish feedback mechanisms, such as surveys and focus groups, to gather insights from employees, customers, and stakeholders. These individuals may be more familiar with the realistic threats your organization faces and can offer insight into them.
- Conduct safety audits of various risk segments, like fire emergency planning or cybersecurity, to spot-check your plan and quickly address any issues.
- Provide ongoing training for employees on risk awareness and reporting procedures, ensuring everyone in the organization understands their role in identifying and addressing potential threats.
Balancing Your Risk Assessment With Your Risk Appetite
In building any kind of response plan, a risk assessment is a common step. However, most risk assessments stop there—at identifying the risk and discussing measures to avoid it. At the same time, accepting some level of risk is necessary for business growth.
For example, consider an enterprise transitioning from a privately traded company to a publicly traded one. This shift is a massive growth driver, opening up new avenues for capital, visibility, and innovation. However, it also introduces a host of new risks associated with increased scrutiny, compliance requirements, and market volatility.
There is financial risk, and that risk is significant. However, the enterprise recognizes that the opportunity to go public outweighs the danger. It is acceptable given the organization’s risk appetite.
Any good risk management strategy involves a tangible understanding of the organization’s risk profile. In the case of going public, the enterprise must have a clear view of the risks involved and use a methodology that aligns them with goals. This ensures that the decision to take the company public is a strategic risk that maximizes the potential for growth while staying within acceptable boundaries. This practical approach to risk management is essential for navigating major business transitions and capitalizing on strategic opportunities.
Performing, Reviewing, and Communicating Your ERM Program
Performing, reviewing, and communicating an ERM framework is a continuous cycle where you will revisit each section time and time again, ideally improving along the way. This iterative process is essential for organizations to actively manage risks, enhance resilience, and ensure alignment with strategic objectives.
Putting Your Action Plan Into Practice
When implementing your plan, you should effortlessly progress through four stages of risk review and response, aligning with your business objectives along the way.
Evaluating Your Risk Management Practices
While an after-action review is not an inherent part of a traditional risk management program, it can be closely related and complementary. AAR is typically used for evaluating and learning from past actions or events, identifying what worked well and what could be improved. In contrast, a risk management framework concentrates on identifying, assessing, and mitigating risks before and during the execution of a plan or project, ensuring alignment with strategic goals.
Here are some questions senior management and other business leaders can consider in adopting an AAR approach for their ERM framework:
- What aspects of the ERM program were executed successfully, and how can we build on these achievements across business units?
- Where did we encounter challenges or errors in the execution, and what measures can we take to address and prevent similar issues?
- What specific actions contributed to positive outcomes, and how can we integrate these into our internal controls?
- What areas require improvement in our risk control strategies, and what concrete steps can we take to enhance our approach?
- Were there any unforeseen circumstances or gaps in our decision-making, and how can we better anticipate and mitigate similar issues in upcoming projects?
A Framework for Continuous Improvement
Your enterprise risk management framework is key to skillfully evaluating and navigating threats. Acknowledging that some risks are inevitable and, in fact, necessary for progress—your ERM framework empowers you to proactively identify, analyze, and address these challenges. This strategic tool fosters a resilient and adaptable organizational approach, not just safeguarding against potential disruptions but also empowering your organization to embrace calculated risks.