Enterprise risk management policy (ERM) is a term used by organizations to strategically describe, identify, and mitigate risks that have the potential to interfere with organizational operations and objectives. ERM seeks to answer this specific question, “What are the risks and hazards that could stop an organization from achieving its objectives?”
In essence, ERM is a holistic, top-down strategy that amalgamates all organizational units in all managerial and decision-making processes and sets precedence for surveillance of dangers to operations. It involves having a plan set in motion to limit organizational risks. Done right, ERM improves overall communication and coordination.
What is an Enterprise Risk Management Policy
In essence, an enterprise risk management policy is an organization’s set plan that guides on how to mitigate and deal with risks. An ideal ERM policy addresses these major niches:
- Risk Avoidance: whereby activities that can harm the organization’s operations are identified and eliminated.
- Risk reduction: whereby unavoidable activities that can cause disruption or harm an organization’s operations are limited and mitigated.
- Alternative actions: whereby possible alternatives are implemented where necessary.
- Insurance: whereby the risks occurring to an organization’s operations are transferred to a third party by procuring an insurance policy.
- Risk acceptance: whereby risks occurring are accepted and their consequences accepted.
What to Consider When Formulating an ERM Policy
For an ERM policy to be ideal and work as intended, the management of an organization should consider these crucial elements:
- The organization’s internal environment: this includes the corporate culture and philosophy regarding risks. It sets precedence all through the organization, from management all the way to the employees.
- The organization’s objectives: this includes the organization’s mission and vision statement, which should be aligned with the organization’s risk appetite. The ERM policy should be associated with these objectives and strategic plans while factoring in the risks associated with them.
- Event identification: an ideal ERM policy factors in positive and negative events that have varying outcomes for organizational operations. It ensures that the organization identifies associated events that may have detrimental outcomes to the organization’s operations and term them as risks.
What to Include in Your ERM Policy
When formulating your organization’s ERM policy, you should ensure that it ultimately creates and protects the value and is systematic, structured, and timely. Moreover, it should account for human and cultural factors, should be responsive to change, be integrated, transparent, and most importantly, should ensure continuous improvement.
These are the areas that your Enterprise Risk Management Policy should cover:
1. Risk Identification and Assessment
Ensure that you assess direct and indirect risks that might be detrimental to your organization’s operations. This includes understanding the likelihood of the risks occurring and quantifying them based on their impacts. All the risks assessed can be quantified in terms of percentage, occurrence, or type. Regardless of whether a risk is deemed to have dire consequences to the organization’s operations or is regarded as residual, an ERM policy should identify and assess it.
Once the risks are identified and assessed, the ERM policy should outline the various strategies for responding to and dealing with them. This includes avoidance, reduction, sharing, and acceptance. These risk response strategies should be appropriate and aligned with your organization’s objectives and goals as well as with the management’s risk tolerances.
An ideal ERM policy should incorporate internal control activities, which are processes that ensure mitigation of risks doesn’t interrupt or stall other organizational operations. Control activities include:
- Preventative control measures: which mitigate risks by stopping certain activities from happening entirely.
- Detective control measures: which identify risks and alert responsible parties to take action and follow up.
An ideal ERM policy should include information, communication, and monitoring practices. The information and communication practices ensure that all organization employees are well aware of risk mitigation and better understand the organization’s risk profile.
Monitoring enables auditing and reviewing and ensures that the ERM policy is adapted to an organization’s ever-changing nature of risks. It also helps to get feedback and provide insights to management on other unprotected risks.
You should ensure that the Enterprise Risk Management Policy is communicated across all departments in your organization.
As you formulate your Enterprise Risk Management Policy, ensure that you factor in your organization’s size, objectives, and risk preferences. To define your risk management process, create an action plan, communicate your priorities precisely, and maintain flexibility.
In today’s digital age, you should also leverage technology, as it is crucial when implementing internal controls and monitoring. Moreover, it would be best if you used a metrics system to quantify the effectiveness of the policy. Last but not least, be creative when designing and implementing the policy and assign responsibilities appropriately.