Enterprise Risk Management in an Increasingly Nuanced Business WorldBy Mark Anquillare | January 6, 2014
The financial crisis in 2008 exposed risk managers to new challenges and forever changed the way many companies do business. Yet, according to a 2013 Treasury Risk Survey, 38 percent of companies in North America acknowledge risk as a threat but still do not have an integrated risk management program in place.
That said, to safeguard themselves in today’s complex business environment, companies must maintain a holistic view of organizational threats — including those to global supply chain, regulation and compliance, product and facility safety, security, litigation, governance, and human capital. Enterprise risk management (ERM) — a dynamic and operations-oriented strategy encompassing all areas of an organization — offers the systematic approach many companies seem to be lacking.
Supply chain represents one area where an ERM system can prove valuable, not only in mitigating risk but managing the business. For instance, managers can risk-score geographic locations — including those of suppliers, distributors, or customers — for natural-disaster loss potential. Supply chain disruptions often take a visible toll on the market valuations of the affected firms, and a comprehensive ERM program using data and analytics can help keep a firm's market valuations healthy. In addition, ERM can also help manage compliance around chemicals or conflict minerals.
Our volatile economic and business climate requires accessing the appropriate tools to lessen the effects of turbulence. Companies implementing a holistic ERM strategy, using advanced analytics and risk-scoring tools, are taking the first necessary step toward ensuring their viability in an environment where an ounce of prevention may ward off a pound of regret.
Finally, ERM is not just about minimizing and managing risk — it is every bit as much about profiting from bearing risk and recognizing opportunities. Basic economics holds that if there were no risk, there would be no reward. ERM provides a vehicle for defining and reaching the efficient frontier — a concept from economics. The frontier simultaneously traces the locus of points showing the minimum level of risk consistent with achieving any given rate of return and the locus of points indicating the maximum rate of return consistent with any given level of risk. That is where the true power of ERM resides.
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