Creating an enterprise risk management (ERM) gives your company a structure for all your risk management efforts, ensuring better consistency and reliability. It also offers you a better picture of the risks your organization faces.
What Is the Enterprise Risk Management Framework?
Risk is the likelihood of things going wrong. An enterprise risk management framework is an extensive approach to discovering, assessing, analyzing, and controlling external and internal risk. It relays fundamental risk management guidelines. It helps create a consistent risk management culture, no matter industry standards or employee turnover.
It guides risk management operations and helps organizations manage complexity, assign ownership, visualize risks, and define responsibilities for analyzing and tracking risk events. Creating an ERM framework is vital because it gives an enterprise a clear picture of its overall risk level.
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What Are the Three Types of Enterprise Risk?
Enterprise risk management framework usually summarizes the`1 risks an organization faces into financial, operational, and strategic risks. Strategic risks affect long-term plans, while financial risks affect an organization's financial standing and health. Operational risks affect daily operations.
What Are the Pillars of the ERM Framework?
The Committee of Sponsoring Organizations of the Treadway Commission
(COSO) ERM identifies seven key pillars that define how an organization should create its ERM framework.
Pillar #1 - Internal Environment
An organization’s internal environment is the corporate culture and atmosphere within that organization set by its employees. This guides the precedence of the organization’s risk appetite and management’s philosophy on incurring risk. The senior management or the board often sets the internal environment and communicates it throughout the company.
Pillar #2 - Setting of Company Objectives
As an organization establishes its purpose, it must also set objectives that support its goals and mission. Those objectives must align with its risk appetite.
Pillar #3 - Risk Identification
Positive risks can positively impact an organization, while negative risks can hurt business continuity. A risk identification ERM program can help you determine which is which. Enterprise risk management framework recommends that organizations identify essential business areas and associated risks that may have dire consequences.
Pillar #4 - Risk Assessment
Besides being aware of what might happen, the enterprise risk management framework also details the measures of assessing risk by understanding the probability and economic effect of emerging threats. This includes direct and residual risks. Though challenging, the enterprise risk management framework encourages organizations to contemplate quantifying risks by analyzing the percentage of occurrence and the financial impact.
Pillar #5 - Risk Response
An organization can respond to enterprise risk in four ways:
- The organization can avoid risks. This results in the organization avoiding activities that cause risks because the entity would rather forego the benefits of those activities than incur associated risks.
- The organization can reduce risks. Here, the organization stays engaged in the activities but takes measures to minimize the possibility or severity of threats.
- The organization shares risks. Here, the organization moves forward with the current risk profile of activities. But it leverages a third-party vendor to share the probable loss at a fee.
- The organization accepts risks. Here, the organization analyzes potential outcomes and determines if it’s financially worth taking mitigating measures.
Pillar #6 - Control Activities
An organization takes these actions to create procedures and policies to ensure senior management carries out its operations while mitigating potential risks as risk managers. Control activities, also known as internal controls, include two processes:
- Detective control processes help organizations recognize when risky actions take place. These internal controls alert leadership to ensure proper follow-up steps happen.
- Preventative control activities stop a risky event from occurring. These internal controls mitigate risks by deterring certain events from occurring.
Pillar #7 - Communication and Monitoring
Information systems must capture vital data to help senior management understand an organization’s risk profile and management of risk. That means not awarding exceptions to business units outperforming others; all aspects of an organization must be monitored continually.
How Does the ERM Framework Tackle Risk?
Enterprise risk management framework is a firm-wide approach to identifying and preparing for threats to a business’s operations, objectives, and finances. It allows management to shape the company’s overall risk position by requiring specific business units to engage with or disengage from certain activities.
What Kind of Risk Is Most Common Within the Business World?
Risk awareness is vital to identifying and managing risk. Here are the most common risks in the business world:
Compliance Risk
Compliance risks are risks to an organization’s finances or reputation that are due to the organization’s violation of regulations and external laws or internal standards. A compliance risk can cause an organization to pay hefty punitive fines or lose customers.
Strategic Risk
Strategic risk arises when an organization’s business strategy is defective or its management ignores the business strategy. Strategic risks may cause a company not to attain its goals.
Operational Risk
Operational risk arises when a company’s daily operations threaten to reduce its profits. External factors or internal systems can cause operational risks for organizations. Operational risks include employee errors, external fraud, or damage to assets.
Enterprise Cybersecurity Risk
A company may experience an enterprise cybersecurity risk if it doesn’t create or adhere to cybersecurity strategies. Lack of software testing, inadequate training of employees, and insufficient policies for cybersecurity updates can hurt your company’s reputation and finances.
Legal Risk
Legal risks threaten a business should it face lawsuits or penalties for regulatory, disputes, or contractual issues. Legal troubles can lead to a negative reputation for a business entity and expensive lawsuits.
Financial Risk
Financial risks threaten the financial standing or debt of a business. Market changes and losses can hurt an organization’s financial status. Financial risks include currency risks, liquidity risks, and default risks.
With a round-the-clock “risk cycle,” where threat actors consistently exploit vulnerabilities, you must have an enterprise risk management plan that handles 24/7 risk monitoring. Our software is always on and continuously reports on what you need to address. Riskrecon’s consistent monitoring capabilities offer accurate and quick security suggestions.
How Should I Build My Risk Management Strategies?
An effective risk management strategy can help your organization plan for potential risks while creating a process to tackle those risks. This will save you money, time, and unwanted disruptions and ultimately protect your business’s future.
Although an enterprise can’t predict the future, using past experiences to build an enterprise risk management framework is vital to help you avoid unwanted threats and protect your future success.
However, although there’s no single approach to developing a risk management strategy, it hinges on the procedure. Creating the right strategies can eventually make the unmanageable manageable.
These six steps can help you build solid risk management strategies:
- Identify risks. If you don’t know the risks your company is facing, you can’t tackle them. Identifying current and potential threats should kick off with a brainstorming session that involves employees from all departments. It’s vital to look at current risks and develop a plan to identify emerging risks.
- Analyze risks. After identifying current and future threats, you should perform an in-depth analysis. A checklist can help you identify your business's current and future risks and how they can ultimately affect your company’s operational and financial aspects.
- Prioritize risks. All risks aren’t equal, so using a checklist to assess risks and the resources you’ll need to tackle them is essential. An extensive list of threats and risks can be overwhelming. Thus, it’s crucial to prioritize risks so that you can address the most pressing threats first.
- Assign responsibilities to risks. After identifying and prioritizing risks, you should ensure someone in your company will manage and oversee those threats. Determining who’s responsible is a crucial internal decision; it can be an employee who works in a particular risk area who is well-suited to handle risks or an arbitrary choice. Creating a risk management team comprising internal and external stakeholders in your supply chain is vital.
- Respond to risks. Responding appropriately to current and potential risks is contingent on building a robust risk management strategy. Identify every major risk and establish a strategy to mitigate it.
- Monitor risks. Every risk management strategy is a living document. Things will change in your organization, and so will risks. As those changes happen, it’s vital to update your strategy so that your company doesn’t become complacent or lose sight of emerging risks in the business world. Integrating a continuous review of your risk management strategies into your organization’s planning activities will ensure you’re on top of all potential risks.
It’s pretty easy to configure RiskRecon to match your organization’s risk appetite: for every inherent risk category, you just need to tune a risk policy for every security criterion. RiskRecon can help you automatically prioritize risks, and it also lets you automatically create third-party risk assessments and action plans that match your risk appetite.
Can My Management Framework Help Avoid Risk?
An enterprise risk management framework puts a lot of rigor on your ERM programs, helping you achieve a performance-based ERM. It offers consistency, structure, and reasonable assurance that you have covered all the potential risks.
Enterprise risk management frameworks help senior management understand, prioritize, and respond to critical risks. They also help employees execute risk-management programs that align with organizational, regulatory, and best practices guidelines. Further, your enterprise risk management framework can help you avoid risks by helping you drive a more consistent risk management culture that reduces the odds of risks “slipping through the cracks.”
What Is the Best Way to Mitigate Enterprise Risk?
Modern companies face various risks and potential threats. In the past, organizations tackled risk exposures through each department managing its risks. ERM calls for businesses to identify all the emerging risks. Also, it makes senior management determine which potential risks to manage actively. Instead of risk being siloed within an organization, a business sees the bigger picture using the ERM.
Enterprise risk management looks at every business unit as a “portfolio” and examines how risks to various business units overlap. Also, it identifies potential risk factors that individual business units can’t see.
Organizations have been managing risks for decades. Traditional risk management practices have relied on every business unit assessing and tackling its own risks and then reporting to the CEO later. Recently, businesses have realized the importance of a more holistic approach.
For example, a chief risk officer (CRO) is an executive position required by the ERM. The CRO identifies, analyzes, and mitigates external and internal risks affecting the entire company. Also, the CRO ensures the organization's compliance with government regulations like GDPR and reviews factors that might hurt an organization’s business units. The ERM framework specifies the CRO’s mandate in conjunction with other senior management, the board, and other key stakeholders.
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How Can RiskRecon Help Me?
Businesses operate in a complicated digital landscape that interconnects and overlaps with many vendors, customers, and partners where sensitive data is shared, and transactions are made. When managed well, the digital landscape is a safe platform where enterprises can achieve their objectives while safeguarding their assets, meeting their regulatory and legal obligations, and protecting their reputation.
RiskRecon’s cybersecurity risk rating model can help enterprises better understand their current and potential cyber risks and act on them across a broader range of use cases and contexts. This model’s unique capability to automatically analyze cybersecurity risk performance depends on the dimensions of the likelihood and severity of risks and the value at risk in the networks where the threats exist.
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