Risks are important in strategic decisions, as well as being the main cause of uncertainty in organizations, and are present in the simplest activities of a company. A broad, corporate approach to risk management enables an organization to account for the potential impacts of all types of risk throughout its processes, activities, products and services.
The premise inherent in Enterprise Risk Management (ERM) is that every organization exists to generate value for stakeholders. All organizations face uncertainties, and the challenge for managers is to determine the extent to which they accept this uncertainty, and define how it can interfere with generating value for stakeholders.
Uncertainties offer risks and opportunities that have the potential to destroy or add value. Enterprise risk management enables managers to effectively address the associated uncertainties, risks and opportunities in order to improve the ability to generate value.
A successful enterprise risk management initiative can affect the likelihood and impact of potential risks, as well as provide benefits related to better-informed strategic decisions, successful change processes and increased operational efficiency.
Other benefits include lowering the cost of capital, more accurate financial reporting, competitive advantage, better perception of the organization, better market presence and, in the case of public service organizations, improved political and community support.
In a risk management process there may be several steps and activities. But the full risk management life cycle can be summarized in only 5 of them, which are the basis of the main risk management regulations, including COSO and ISO 31000. They are:
The starting point is to pinpoint the risks and define them in detail and in a structured format.
Risks are evaluated for their likelihood and impacts.
An approach to the handling of each risk should be defined, which, in some cases, may be simply doing nothing. This requires an analysis of the acceptability of the risk and may require an action plan to prevent, reduce or transfer the risk.
An ongoing review process is essential for proactive risk management, reassessing risks and monitoring the status of actions and controls implemented.
Communication in each of these four stages is a fundamental part of an effective decision-making process in risk management.
This post has only briefly touched on the 5 steps, but if you want to learn more, read the eBook I wrote on this topic! I hope you enjoy it.