A topic on ERM such as this may appear obviously grey to many. To shed light, we could rephrase the topic to focus other bodies of knowledge such as accountancy, insurance and information technology respectively, for instance.
If the topic, assuming, was: ‘How double entry accounting benefits your organisation’, what readily would come to the mind of an accounting knowledgeable person would be that the contrast is a single entry accounting system. The accountant could then tell you the several limitations of a single entry accounting system to include: no general ledger in place; a trial balance cannot be cast; any statement of comprehensive income produced will be inaccurate; it will be impractical to draw up a statement of financial position and all that.
In the same vein, if the topic was rephrased to read, say: ‘How buying Insurance benefits your organisation’, it would readily come to the mind of an insurance sales person, insurance technical service provider or a user of insurance service that the other side of the coin is a self-insurance or no-insurance of the underlying hazard. The insurance professional would tell you of the exposure that such an organisation will have to weather on its own.
If we also rephrase the topic further to read: ‘How Management Information System Benefits your Organisation’, to the mind of an Information Technology (IT) savvy person, the reverse scenario would be an organisation that captures data and processes information manually. The IT savvy would right away warn that such an organisation would face several limitations in its operations ranging from: slow data processing speed to inability to handle large volume of data and error prone reports and such like.
All of these scenarios paint pictures of organisational core processes needing deployment of enhanced framework and a sustained maturity. Interestingly, as the organisation engages the right skills and technology and deploys the appropriate framework, it is able to enhance an inadequate core process and thus shift the paradigm in a way that benefits its stakeholders. Such is just the case with introducing ERM to organisations. Risk management had always been practiced in every organisation, albeit in silos. The advent of ERM therefore comes with a holistic and structured approach to risk management.
Increased organisational failures, over the past two decades, and particularly the global financial meltdown of 2007-2008 have taught the world the lesson that no organisation is too big or too old to fail. It has, accordingly, focussed the attention of investors, regulators and stakeholders generally on the way in which those entrusted with the fortunes of organisations manage risks. As it became clearer that systemic failures such as the global financial melt-down of the last decade was not a failure of risk management but a failure of organisations in managing their own risks, this has lead to a greater appreciation of the wider scope of risks facing organisations. This in turn has led to risk management becoming a core regulatory focus. It is now common place to see that ERM is an established role in many organisations’ system of governance. Regulators today, particularly in financial services, are reforming and converging around ERM in order to secure a viable and sound financial system. ERM global convergence will continue to attract more adoption by financial services regulators in various countries and territories all over the world.
Coming to address how ERM benefits your organisation, you will discover that:
- there will be a holistic and structured approach which will simultaneously focus both idiosyncratic and systemic risk exposures of the organisation;
- as organisations implement ERM, they begin to learn to set and track objectives;
- there will be risk ownership and efficient core processes;
- Key dependencies are focused and business continuity risks are tracked.
There are much more benefits of implementing enterprise risk management. Best practice ERM frameworks are designed and deployed to the fit of organisations. The more complex an organisation grows, the more robust its risk culture should also grow. Fewer organisations will fail with a sustained culture of holistic and structured approach to the management of enterprise risks.
Steve Nkwor MIRM (UK)
Steve Nkwor a risk management consultant and writes from Lagos, Nigeria. He is a passionate promoter of down side zero tolerance. He holds full membership of the Institute of Risk Management of London. He is also a fellow of the Institute of Chartered Accountants of Nigeria as well as an associate of the Chartered Insurance Institute of Nigeria and can be reached on snkwor@snaconsulting.org.
