5 Elements of an Enterprise Risk Management Framework

An enterprise risk management framework should include the following:

1. Risk Governance and Culture

An organization’s internal environment is the most important ERM as it’s the ultimate source of its risk management strategy. 

The board of directors and senior management must establish a culture of risk oversight and compliance. Promote a risk-aware culture where employees at all levels understand the importance of risk management and their role in it.

The values, actions, and attitudes espoused by a company’s senior management will reverberate throughout the operations of each department. An organization with a risk-aware culture will provide the support and resources to protect all parties from unnecessary risk exposure, whereas establishments with less structure could have consistent problems meeting their objectives and avoiding legal trouble.  

There are several practices you can implement to create a positive risk management culture such as: 

• Creating an independent risk committee that provides risk oversight for the entire organization. Their authoritative powers and place within the organizational structure should be outlined in the risk committee charter. 
• Aligning risk management activities with overall company goals,
• Encouraging employees to communicate and share any concerns regarding potential risks. This can be done through regular meetings or anonymous reporting channels.
• Developing training programs to educate employees on how to identify and address potential risks.
• Rewarding employees who display high-level risk awareness. Doing this actively rewards workers for thinking deeply about risk management.
  
  

2. Risk Appetite and Tolerance

Risk appetite describes the amount and types of risk an organization is willing to accept when attempting to achieve its strategic objectives. Risk tolerance refers to the level of risk an organization can withstand before its ability to meet its objectives becomes negatively impacted.  

The combination of these two elements helps define an organization’s boundaries and provides a greater context for the decision-making process of executive leadership. Find the right balance between risk appetite and risk tolerance to allocate resources wisely and enact strategies that strive for growth without leaving the organization vulnerable to potential risks. 

3. Risk Identification

Risk identification (also known as event identification or “framing the risk”) is an ongoing process of identifying potential internal and external risks that could negatively impact the organization’s ability to accomplish its goals. When undergoing risk identification, the organization studies its culture, business processes, and enforced policies to take note of any risky events that could pose a threat to the company’s operations. 

High-risk events can range from new regulations that affect your ways of doing things to natural disasters that force important locations to close for an extended amount of time. Possible risks should be documented with risk statements kept in the company’s risk register. These documents should aptly describe the situation and the consequences if these incidents take place.

4. Risk Assessment and Measurement

After identifying potential risks, the next aspect of an enterprise risk management framework is to assess the likelihood, potential impact, and your organization’s ability to respond to these risks. Risk assessments (sometimes referred to as risk analysis) help management categorize and quantify the level of risks by measuring the chance of each risk occurring and giving them an overall risk score on a risk assessment matrix. 

5. Risk Monitoring and Reporting

Periodically monitoring your risk management policies and operations is another crucial element of any effective ERM process. It’s inevitable that an organization’s goals, stakeholders, and risk profile will change as circumstances change and the wider industry evolves. This fact means that the benchmarks for risks will also shift as a result. Companies need to be prepared to pivot when necessary. 

Risk monitoring can take the form of evaluations for each department, reviewing documents, analyzing organizational data, meetings with managers to give and receive feedback, and informing relevant parties of unprotected risks. These reports can be completed by an internal committee or an external auditor. Any significant adjustments to the ERM strategy should be reflected in updated policies or procedures. 

Proactive risk reporting allows your team to make iterations to your risk management process, helping you stay ahead of any larger-scale changes that impact the organization.