The world of business is truly fascinating. Businesses provide a livelihood to the majority of the human race. Even farmers also depend on businesses to sell their products and get inputs for farming.
However, to most of us, the world of business remains a mystery. In this series of blogs, we try to unravel the mysteries of the business.
In this blog, we will learn about the ‘Purpose of Risk Management.’
The purpose of ERM activities in an organization is to provide a comprehensive program to proactively manage the portfolio of what leadership collectively believes are the most critical risks to the achievement of the entity’s mission and objectives.
ERM promotes an ongoing, risk-aware culture across the organization to enable decision-makers to perform a risk-reward analysis of choices and make decisions with an understanding of the implications of such actions while pursuing the mission and goals of the organization.
It is not intended to be a one-time process or a prescriptive method for managing individual risks, but instead a tool for leadership to use in managing existing and emerging risks within their portfolio of activities.
Why Enterprise Risk Management (ERM)?
Enterprise risk management (ERM) is a plan-based business strategy that aims to identify, assess, and prepare for any dangers, hazards, and other potentials for disaster—both physical and figurative—that may interfere with an organization’s operations and objectives.
The discipline not only calls for corporations to identify all the risks they face and to decide which risks to manage actively, but it involves making that plan of action available to all stakeholders, shareholders, and potential investors, as part of their annual reports. Industries as varied as aviation, construction, public health, international development, energy, finance, and insurance all utilize ERM.
Enterprise risk is the extent to which the outcomes from the corporate strategy of a company may differ from those specified in its corporate objectives, or the extent to which they fail to meet these objectives (using a “downside risk” measure).
The strategy selected to achieve these corporate objectives embodies a certain risk profile, which arises from the various factors that might impact the activities, processes, and resources chosen to implement the strategy
A range of external and internal factors can cause the outcomes of a company’s activities to depart from those set down in its corporate objectives. Some external factors relate to those in the marketplace in which a company competes, such as new entrants into the market, changing consumer tastes, or new product developments.
Other external factors arise from a wider context, such as changes in the economy, changes in capital and financial market conditions, and changes in the political, legal, technological, demographic, and other environments. Most of these are beyond the control of management, although active.
Some general propositions on enterprise risk management
This broader concept of enterprise risk management gives a clearer positioning on how insurable risks and treasury or financial risks should be viewed within the organization.
- Enterprise risk is embodied within the corporate strategy of an enterprise (i.e. its choice of corporate activities and its choice of the resources and organizational structure to implement these activities) within the context of the uncertain environments in which it operates.
- Enterprise risk can only be effectively measured in terms of an enterprise’s corporate objectives. The degree of risk is the extent to which the actual outcomes from the activities of an enterprise differ from (a variance concept of risk), or fail to meet, these corporate objectives (a “downside” concept of risk).
- Where the enterprise is a quoted company, the more closely aligned are the corporate objectives that are set by management to those of its shareholders’ interests, the closer will enterprise risk be to the stock market’s own risk assessment of the company.
- Since the financing of the risks faced by an enterprise should be integrated into the overall financing of the enterprise itself, insurance buying and self-insurance decisions and hedging policies need to be closely coordinated with its broader cash management and capital structure decisions.
- Risk-retention decisions on insurable risks (e.g. choice of deductible levels) and risk retention decisions for financial risks (e.g. choice of “strike prices” on options contracts) should be determined jointly; both types of risk are subsets of the overall enterprise risk and hence are unlikely to be independent of each other.
What is Compliance Management?
Compliance management is the process by which managers, plan, organize, control, and lead activities that ensure compliance with laws and standards. These activities can include:
- Internal audits
- Third-party audits
- Security procedures and control
- Preparing reports and providing supporting documentation
5.Developing and implementing policies and procedures to ensure compliance
Why Compliance Is Important
Compliance is important for at least eight reasons.
1) Compliance is part of your organization’s duties to its community and stakeholders. The first reason is the most basic. If you run a business (whether for-profit or nonprofit), you benefit from your community’s basic services.
In return, you owe a duty to comply with the law. Furthermore, if you use the resources of others (investors, creditors, donors), you need to be able to assure them that you are regulating the conduct of your employees and that you are complying with applicable rules and regulations.
2) Without a compliance function, you cannot reliably build or maintain trust with others. Trust is fostered through three elements:
(1) Repeated interactions with another person;
(2) Honest communication with that person; and
(3) Following through on commitments.
Organizations cannot ensure that they are meeting element (2) or (3) unless they have adopted rules about proper communications and proper follow-through.
The head of the organization can’t be confident that others are being honest in their interactions unless the organization has adopted rules about honesty and trained people about the importance of honesty and candor.
3) If you have no compliance function, you invite reputational damage. It’s no surprise that leaders consistently rank reputational risk as their number one worry. If you are not trusted in the marketplace, customers are unlikely to work with you. On the other hand, if you are trusted, customers will give you the benefit of the doubt.
4) Compliance helps define an organization’s “why.” The “why” of an organization drives and motivates its efforts. One crucial aspect of that “why” is the set of values and ethical principles that guide the organization’s behavior.A compliance function leads an organization to determine those values and ethics. It requires the organization to describe those values and ethics sufficiently that team members understand them and will refer to them.
5) Compliance helps define and regulate an organization’s “how.” Continuing reference to Sinek’s work, compliance helps an organization define and monitor its “how.” Compliance focuses on what behaviors will and won’t be permitted in the execution of the “why
6) Compliance can serve as a driver of change and innovation. Some people view compliance as inherently conservative. They think the purpose of compliance is to rein in conduct. Again, that’s not true. Compliance instead can serve as a powerful tool of long-term change.
If everyday behavior stems from training and codes of conduct, and codes of conduct stem from values, articulation, and modification of values over time can profoundly influence organizational behavior. In the words of system theorists, values can be a leverage point, and compliance ultimately focuses on the driving values of an organization.
7) Compliance enhances consistency. Without a compliance function, decisions are ad hoc and made in a vacuum. Articulated values, ethics policies, and codes of conduct provide reference points for making decisions a matter of routine.
8) Compliance can reduce unforced errors. I end with an important risk management concept. Unforced errors are the most common risks to organizational performance, and compliance helps prevent unforced errors.
What is Remediation management?
Once a regulator has identified noncompliance with critical issues, the overall value of the organization is reduced. However, the business value can be stabilized and even increased through fast, efficient, and effective remediation efforts.
Responsibilities for managing regulatory risk can be spread throughout the organization. However, decentralization can result in slower adoption of priorities, different priorities, and goals across the organization, and varying degrees of responsiveness from the impacted business owners.
Introduction to business resiliency management
Business resilience management is the holistic management of the processes to identify potential risks based on impacts that threaten an organization. One of the most critical aspects of achieving business resilience, a strong BRM program, can help enable organizations to rapidly adapt and respond to risks, as well as opportunities, in order to maintain continuous business operations, be a more trusted partner and enable growth.
About Adaptive US
Adaptive US is the world’s #1 leading IIBA EEP. It is the only training organization that provides IIBA certification training with Success Guarantee. Adaptive is a World Leader in IIBA CBAP training, IIBA ECBA training, IIBA CCBA training, IIBA CBDA training, IIBA CCA training, and IIBA AAC training.
Adaptive is a global leader in business analysis certification training with 800+ internationally certified professional. It also conducts BA skill training on Jira, BPM, MS Visio, Balsamiq, UML, Interview Preparation as well as Resume Preparation.
Adaptive has published the following books on business analysis-
- The Handbook of Business,
- 1000 BA Interview Questions,
- Business Consulting 101,
- Practical Requirements Engineering,
- Agile Business Analysis,
- Big Book Of Corporate Jargons,
- Giant Book of BA Techniques,
- Stories for Trainers,
- Practice BA Techniques with Lucidchart,
- Mastering CPRE-FL,
- CPRE-FL Question Bank,
- A Beginner’s Guide to IT Business Analysis.