The outcomes of business activities always have some elements of risk. This includes strategic failure, operational failure, financial failure, market disruption environmental disaster or regulatory violation. Proper risk management provides a mechanism for identifying risks which represent potential pitfalls. There is a need to adopt holistic approach to risk management.
Traditionally, risks have been managed in companies independently by respective functional managers. But this risk management fails to recognize that different risks can overlap and cancel out with each other or can even concentrate together to hinder achievement of organizational goals.
How Enterprise Risk Management started?
The Integrated Framework of the COSO Enterprise Risk Management in 2004 was a landmark in the history of risk management. This framework provided guidance to the management teams, to implement their risk management programs. Therefore in most organisations a new function called risk management was established which attempted to identify and mitigate risks, which were most often financial, operational in nature.
Enterprise Risk Management (ERM) overcomes the problem by taking a broad, top-down, holistic and strategic approach to managing risks with a ‘portfolio view’. It incorporates risk management into all major aspects of an organization, be strategy formulation, reporting, compliance, or daily operations.
With globalization, more and more Indian companies are expanding their operations into newer geographies and are getting themselves listed in foreign exchanges. These companies are getting exposed to potentially newer and greater risks arising from different economic, political, cultural, and other global uncertainties. Indian companies these days are also enjoying funds from foreign investors and providing outsourcing services to foreign lands. This makes the foreign investors and foreign buyers of outsourcing services exposed to various risks, which they need to be informed about. Such developments have made adoption of ERM very critical for the success and growth of the companies in India.
Risk Management should not be viewed as a mere process, but as the culture, capabilities that help an organisation survive and thrive. So, the focus should be no longer only on identifying risks to executing strategy but to evaluate how strategy aligns to the organisation’s mission, vision, core values. This enhanced coverage of risk management should help in ensuring that stakeholder value can be created, preserved and realized.
The evaluation of strategic options would require that strengths and weaknesses of all alternatives are considered, including how the strategy aligns with the organisation’s mission. The risk profile of each strategy would have been thoroughly considered, before embarking upon the chosen one. Risk indicators and response can be thought through, based on the profile of the strategy. The organization is in a state of readiness to take on the uncertain times that we live in.
Thoughtful ERM programs help companies anticipate, adapt and respond to change. They also focus management efforts and resources on the risks and opportunities that truly matter in terms of their impact on strategy and performance harnessing the true value of Enterprise Risk Management.