Protecting enterprise value
Directors and CEOs face many challenges in protecting enterprise value. They must focus their organizations to capitalize on emerging opportunities. They must continually invest scarce resources in the pursuit of promising though uncertain business activities.
They must manage the enterprise value in the face of constantly changing circumstances. And as they do all of these things, they must simultaneously be in a position to provide assurance to investors, directors and other stakeholders that their organizations know how to protect and enhance enterprise value.
Amid constantly changing risk profiles, directors and CEOs need a higher level of performance from every discipline within the organization, including risk management.
ERM will help directors and CEOs meet these challenges by establishing the oversight, control anddiscipline to drive continuous improvement of an entity’s risk management capabilities in a changing operating environment.
ERM redefines the value proposition of risk management by providing an organization with the processes and tools it needs to become more anticipatory and effective at evaluating, embracing and managing the uncertainties it faces as it creates sustainable value for stakeholders.
By continuously improving the risk management capabilities that really matter to the successful execution of the business model, ERM elevates risk management to a strategic level.
As ERM is deployed to advance the maturity of the organization’s capabilities for managing the priority risks, it helps management to successfully enhance as well as protect enterprise value in three ways. First, ERM focuses on establishing sustainable competitive advantage.
Second, it optimizes the cost of managing risk. And third, it helps management improve business performance. These contributions redefine the value proposition of risk management to a business.
These valued-added contributions from ERM lead to possibly the greatest single benefit risk management provides for the success of a business: Instill greater confidence in the board, CEO and executive management.
These stakeholders need to know that risks and opportunities are systematically identified, rigorously analyzed and cost-effectively managed on an enterprisewide basis, in a manner consistent with the enterprise’s risk appetite and business model for creating value. Under ERM, executives are more knowledgeable of the risks inherent in their operations.
They understand the process by which risks are identified, assign risk ownership in a timely fashion and ensure that risk responses are formulated timely and monitored effectively.
They also bring to bear systematic risk assessment techniques to new risk-taking ventures. They insist that business plans incorporate a focus on risk, so that they will be more substantive and robust.
In summary, in an ERM environment the assumptions underlying the business model are periodically challenged and, if necessary, refined in a dynamic cycle of continuous improvement and change.
It is vital to understand that the above articulation is generic. Because a generic value proposition is not sufficient to drive senior management decisions to invest in ERM infrastructure, it must be supplemented with a more granular articulation made possible by an enterprise risk assessment and a gap analysis around the entity’s existing capabilities for managing its priority risks.
The greater the gap between the current state and the desired future state of the organizations risk management capabilities, the greater the need for ERM infrastructure to facilitate the advancement of those capabilities over time. This understanding improves the specificity of the ERM value proposition, making it more compelling.
In summary, an effectively functioning ERM infrastructure can become one of the root differentiators between mere survivors and industry pacesetters. Beyond delivering the above benefits, redefining the value proposition of risk management will add to the CEO’s storyline with stakeholders in today’s demanding environment.
An ERM infrastructure stimulates and reinforces desired behaviors within the organization consistent with its business objectives, strategies and performance goals. An ERM approach differentiates the firm’s business model and helps to build its image and reputation with customers, suppliers, employees and the capital markets, all of which are keys to sustaining a successful business.
Enterprise value can be achieved through implementing ERM