The goals of Enterprise Risk Management (ERM) may vary somewhat from one organization to another, but there are several objectives that are common to most organizations:
- Competitive advantage -Compliance with laws and regulation.
- Strategic goals –High-level goals designed to support the municipality’s mission or vision.
- Reporting-Reliable financial and operational data and reports.
- Operations-Efficiency of operations, including achievement of performance goals and safeguarding against loss.
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Key Point
ERM encourages organizations take a holistic approach to risk management by concentrating on “the bigger picture.” |
1. Competitive Advantage
Entities compete all the time for residents, business and industry. All organizations are in the business of taking risks and the way in which that risk is managed plays a crucial role in their success and survival.
Traditionally, many organizations treat different types of risks as separate matters and deal with them independently. Enterprise Risk Management, on the other hand, manages risk holistically. Organizations using ERM may have a competitive advantage over those using traditional risk management approaches.
2. Strategic Goals
In order to achieve strategic goals and objectives, organizations need to use both offensive and defensive planning. While taking on specific risks may result in a competitive edge, a municipality also needs to make sure it understands what it is getting into before jumping in. Conversely, merely maintaining the status quo and playing it safe might not be the best way to maximize capital.
ERM can influence business planning by identifying previously unidentified opportunities and risks. It also provides a way for senior management to translate their vision into viable strategies while making sure that these strategies result in sustainable competitive advantages. Some of common strategic goals are:
Stakeholder Value
Enterprise Risk Management can help an organization achieve its business objectives and maximize stakeholder value. Risk management adds value not only to individual entities, but also supports overall economic growth by lowering the cost of capital and reducing the uncertainty of organizational activities.
Quick Tip
It is very difficult to offset the harm caused by a speculative risk through traditional means. |
Transparency of Management
ERM involves:
- Setting risk appetite and policy
- Determining organizational structure
- Establishing corporate culture and values
These three tasks are closely related to the work of senior management. With ERM in place, management goals can be more easily communicated to employees and further increase the transparency of management.
Decision-making
In order to make sound and effective decisions, senior managers need sufficient information. Senior managers need to evaluate opportunities based on not only the benefits and potential returns, but also the risks associated with them. Furthermore, ERM requires the integration of risk management into the business processes of an organization. ERM optimizes performance by supporting and influencing resource allocation, and other business decisions.
Speculative Risk and the Bottom Line
Enterprise Risk Management helps ensure effective reporting and compliance with laws and regulations, and helps avoid damage to your municipality’s reputation and bottom line. Traditional risks such as fire or slip and falls, fleet breakdowns etc, are readily managed and identified through traditional risk management.
The harm caused by a speculative risk such as damage to an organization’s reputation, is not as easily identified or managed through traditional means. Such risks will often have many more long-term effects and consequences for the bottom line.
One need only look at organizations where senior managers or employees have engaged in questionable moral conduct to appreciate the impact of this type of risk. It is far more difficult to offset a negative organizational image in the court of public opinion, than it is to pay a claim for property damage. The cost of this type of risk is usually far greater than those pure risks that are covered by traditional insurance.
ERM encourages employees, managers and other stakeholders to think outside the box when identifying and prioritizing risks. By taking a broader approach to identifying and managing risk, ERM increases the scope of traditional risk management in identifying and helping to manage both pure and speculative organizational risk.