3 Reasons to Make ERM a Higher Priority This Year (article)
Your organization’s stakeholders are growing more sophisticated. They want to know that your organization is managed responsibly and that is both efficient and resilient to its risks. Investors, employees, regulators, customers, and even to an extent, the public and the media, want to see how well your organization is being run.
One of the best ways management teams can ensure their organization meets all of its expectations is by taking a holistic approach to the various risks that face the business. Risk that goes undetected can derail even the best-laid set of goals and business objectives. Organizations that understand the events that may affect their strategy, product development, or services delivery as well as intelligence that could have an impact on growth, market share, and organizational health – are better equipped to anticipate and react to risk events that can alter the course of the business.
An enterprise risk management (ERM) program is designed to enable management to understand the organization’s risk environment and make intelligent decisions to optimize performance within that environment. The following are just a few reasons why refining your ERM program should be a top priority for your organization.
Preventing the Downside of Risk
By developing, prioritizing, and managing your risk landscape, you can proactively identify and respond to events before they occur. Each segment of your business should be represented in the risk assessment process. Members of the broader team may be able to identify potentially significant business issues before disaster would strike.
A semiconductor manufacturer conducted a roundtable session with senior leadership to identify and evaluate risk exposures of the company. Attendees included CEO, CFO, CIO, CRO, General Council, and the Executive Vice President of Operations, who all had a different view of risk based on their roles and responsibilities. By bringing together the different perspectives of risk, leadership was able to effectively identify and prioritize critical risks of the company. During the dialogue regarding operations of the foundry, it was uncovered that a water pipe was installed directly over water-sensitive equipment that is critical to the manufacturing process. If an unplanned interruption of those machines occurred, the result would be devastating to the company. The semiconductor manufacturer decided to relocate the water pipe immediately, preventing a major risk event that could have put them out of business.
Minimize the Downside of Risk to Increase Competitive Advantage
Being prepared to quickly respond to events that can alter your strategy, influence product development or service delivery, and affect growth, can better enable you to improve competitive advantage, increase market share, and protect your organization’s long term viability. In a 2018 study by North Carolina State University and the American Institute of Certified Public Accountants (AICPA), fewer than 20 percent of organizations said they successfully integrated their ERM function with their strategic and business planning. Early adopters have an opportunity to maximize the value proposition for their ERM program to senior leadership. Take the following examples.
An agricultural company implemented an ERM program and identified, prioritized, and implemented risk mitigation strategies for its critical risks. The ERM program helped the company quickly respond to a new strain of a plant disease and treat it with minimal impact to crop health, yield and production. Many of their competitors were left unprepared for this event and incurred significant loses to their crops and production. As a result, the company realized a significant increase in sales and market share.
A brand management company that licenses brands to retailers and manufacturers in the apparel, footwear, and apparel accessory industry recently underwent a comprehensive risk assessment effort under its ERM program that included the board and senior leadership. Based on the company’s risk dialogue, it identified risks associated with its ability to foster further growth that included royalty rate pressure, retailer shift toward in-house brands, and organic growth capabilities. The brand management company realigned its business strategy for these considerations and improved business performance to increase its competitive advantage.
A Holistic ERM Approach Can Save You Money
Knowing your top risks to the organization and the controls in place to mitigate them is beneficial when it comes to insurance coverage. A robust ERM system could be a guide in making sure that you have the right level and types of coverage for your various sources of risk. An ERM-optimized insurance approach helps your organization be more confident that when the time comes to make a claim, your organization is adequately protected to cover its losses.
ERM can also help your organization save money by operating a more effective internal controls environment. A holistic approach to risk may identify potential human resources issues that could put your organization at risk of employment law noncompliance. It may also identify critical gaps in your information security protocol that if not addressed, could create reputational harm if an information security breach were to occur.
For More Information
An experienced ERM provider can help your organization organize fine-tune your ERM efforts. For specific comments, questions or concerns about ERM, please contact us.
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