9 success factors for Enterprise Risk Management

Boris Agranovich

This article is part of the series "Popular Risk Management". The aim of the series is to describe the main risk management topics in simple, clear and concise language. To stay updated on the recent trends, please make sure to check out our Risk Management Show podcast on the major podcast apps or via the following link: https://globalriskcommunity.libsyn.com/

Both the number of companies that installed Enterprise Risk Management (ERM) systems and the quality of the systems is greatly increased in recent years. This is evident from the global ERM 2010 study of risk consultant and insurance broker Aon based on data from more than two hundred companies.

Nearly two thirds (62%) of companies said that they going beyond a formal ERM process. In 2007 this number was only 38%. This increase is a clear indication that the risk management steady gains an integral character. Also research shows that these companies pay more attention to their environment and transparent relationships with stakeholders, including shareholders, customers, suppliers and employees. With an ERM system, companies have tools and ability to systematically identify, measure, manage, report and monitor risks throughout the organization.

The number of companies with an advanced ERM program more than doubled from 3% to 7% compared to three years ago. The latter group indicates that with modern ERM techniques they able better and quickly organize and effectively adapt to changing circumstances. Also, they can better realise opportunities that arise as a result of these changes.

Shareholders value
The majority (64%) of the organizations that claim to have set up an advanced ERM system, indicates that they actively use it to increase shareholder value. ERM contributes not only to optimisation of total risk costs. The use of risk information in strategic decision-making also leads to lower losses, lower costs and more successful investment projects.

"As a company boards and managers understand the key business risks and opportunities, and their impact on the success of the organization, then they make decisions that better reflect the business strategy and the external environment," said Armand Hoftijzer, Managing Director Aon Global Risk Consulting Netherlands. "The report describes how organizations with an advanced ERM systems are able to look beyond just avoiding and minimizing risks. They set up risk management to achieve sustainable growth, continuity and profitability."

Characteristics of successful ERM
Aon uses a five-stage ERM maturity model to evaluate such programs, ranging from “initial/lacking” through “basic,” “defined,” “operational” and “advanced.”

The advanced ERM level is marked by a “well-developed ability to identify, measure, manage and monitor risks across the organization; process is dynamic and able to adapt to changing risks and varying business cycles; (and) explicit consideration of risk and risk management,” according to Aon.

1. Close involvement of the Executive / Board
2. A senior executive as the driving force behind the ERM process
3. A `ERM culture at all levels of the organization
4. Involvement of all stakeholders
5. Good communication on risk
6. Integration of financial and operational risks for decision
7. Advanced methods and techniques for risk management
8. Identification of new risks using internal and external information
9. Shifting the prevention of risks to exploit risk

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