ERM Adds Strategic Value

As enterprise risk management ("ERM") becomes a more widely accepted practice, many companies are realizing the value of including a risk viewpoint in their strategic planning exercises. In the past, many executives viewed risk management purely as a loss avoidance exercise.  However, now that ERM is providing a broader view of risks and allowing companies to become more resilient, companies are more willing to incorporate the employment of calculated risks into their strategy formation.  A recent study by the Economist Intelligence Unit provides the following insight into this changing view of ERM.

One important indication that a shift might be occurring, however, is that 75% of executives think that risk considerations are playing an increasingly important role in strategy at their organisations. This suggests that rather than playing a preventative role—avoiding financial losses, for example—risk management could be moving towards an enabling role that contributes more fully to corporate strategy.

To navigate risks for both the shorter and the longer term, many firms are beefing up their risk management systems. ABB, for one, is increasingly moving away from a decentralized risk management model and putting in place a more group-wide strategy. “We’ve put in place a centralized enterprise risk management program over the last 12 months, and viewing holistically all the risks we face in the organisation,” confirms Mr Hall. “What we realized in the financial crisis, particularly from a financial point of view, is that the best way to manage risk is centrally.”

Martin ten Brink, a director at Shell, a British oil giant, says his company intends to refine some aspects of its enterprise risk management system in the coming year, particularly the pricing of risk. Furthermore, he says, Shell is improving the way it gauges risk velocity. The firm is targeting “a better understanding of the speed with which a risk can materialize and impact business performance.”

Wheelhouse Advisors is uniquely qualified to help companies build ERM programs that can be a source of strategic value. To learn more, visit www.WheelhouseAdvisors.com.