ERM – Governance, Risk & Compliance to Value Creation

ERM – Governance, Risk & Compliance To Value Creation

In the past few years, organizations across the world have focused more on ERM (enterprise risk management) development. Most of the ERM programs are primarily tasked with maintaining compliance requirements, due to which organizations are unable to access the full value of the robust risk management frameworks. The success of any ERM framework depends on its governance, risk, and compliance solutions. The framework plays a crucial role in risk awareness, facing risks, and providing tools to set risk-conscious conduct in daily decision making.

Elements of an efficient framework are:

Transparency And Awareness

Providing detailed information on all possible risks. Development of KPI’s (key performance indicators) for early warning system of structural risks and testing the durability of the organization under unexpected scenarios.

Strategies

Specifying the favorable risk returns and assigning an efficient team on a precise and strategized risk control enable the organizations to calculate the tradeoff positively.

Governance

ERM is a high-level management priority. Defining roles of each person of the enterprise in ERM is a critical factor for better safety. It helps in the development of an excellent governance framework which helps organizations under adverse scenarios.

Decision-Making Process

By increasing the coordination amongst all employees in an organization, strategizing ERM becomes easier. Assigning a chain of command for decision making is necessary so that the organization can avoid complications.

If an ERM framework is confined to risk function, an organization cannot obtain its full value. Organizations need to address this critical issue and improve the implementation of ERM for more significant value creation. ERM teams must provide their advice on optimizing the risk-return decisions. They should help enterprises to manage both the downside scenarios as well as optimize risk-taking.

Downside scenarios – It is a regular identification, assessment, and prioritization of the top risks in the organization and business-level units.

Risk Taking – It refers to carrying out analysis to identify the impact of any scenario on the enterprise’s risk profile and adjust it in the risk appetite and mitigation plans.

 

Benefits Of ERM

  • Providing Prominent Insight On Business Performance

Enterprises are still struggling with risk-based performance management. Assumptions made on market conditions often change with respect to time. The tradeoffs amongst short-term and long-term value generation are not understood sufficiently at the operational level. ERM helps the management to address these issues and allows them to optimize their performance based on a better understanding of risk drivers. It helps in planning for stress scenario by linking the financial plans to risk simulations.  Linking simulations to financial planning provide a better definition of results under various business assumptions. By the establishment of this link, identification of various vulnerabilities in risky scenarios becomes easy.

  • Providing Active Capital Management

Efficient and active capital management helps an enterprise in deciding the capital needs and allocation of its entities. It enables the enterprise to allocate capital to promising businesses. Capital management requires a practical perspective on all relevant risks as well as the associated benefits. The planning process includes all the governance, risk, and compliance metrics for stress management of the organization. All the assumptions and parameters regarding capital decisions must be apparent to the business. The ERM helps in refining and testing the hypotheses that are made by the management.

  • Providing Ideas To Improve The Accuracy Of Risk Selection

Enterprises often set risk limits in accordance with the level that will stop the working of an enterprise during risky scenarios. Good ERM teams set flexible escalation processes that allow businesses to govern the risk factors properly.

There are various practices that an organization can follow to use ERM to help them in value creation. They are:

  • Making risk management a top priority
  • Focusing on both hardware and software
  • Hiring skilled employees
  • Developing performance dashboards for management actions
  • Making required investments
  • Promoting risk-oriented culture

With the cut-throat competition in the market, organizations are looking for methods to increase their growth. ERM not only helps in managing risks, but also promotes the growth of the organization. By including governance, risk, and compliance solution, it can create a higher value of development for the enterprise.