The Importance of Enterprise Risk Management in Today’s Organizations

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Table of Contents

Introduction
The Difference Between Traditional and Enterprise Risk Management
Why ERM is a More Effective Approach for Today’s Organizations
The Key Drivers of Value-Driven ERM
Key Drivers’ Application Within the Healthcare Sector
Conclusion
References

Introduction

Risk management (RM) relates to the procedure of distinguishing, evaluating, and managing threats to a company’s earnings and capital. An RM plan allows businesses to prepare for unanticipated occurrences. The RM process assumes two primary forms: traditional and enterprise risk management. This paper expounds on these two conceptualizations by elucidating their underlying differences, describing the importance of enterprise risk management in today’s organizations, its primary drivers, and their applicability in the healthcare sector.

The Difference Between Traditional and Enterprise Risk Management

Enterprise risk management (ERM) relates to the procedure of distinguishing and addressing potential threats likely to adversely impact a company’s strategic objectives’ attainment or its opportunity to achieve competitive advantage methodically. Contrarily, traditional risk management (TRM) refers to the forecasting and assessment of uncertainties integrated with the identification of processes for minimizing or averting their impact (Anton & Nucu, 2020). The TRM approach relies on tactical RM processes, whereas ERM depends on a strategic RM methodology. As indicated earlier, the conventional RM procedure focuses on averting loss within the business department. Contrarily, ERM’s primary focus is to minimize threats, increase sustainability, and generating value or savings across the entire corporation.

The TRM approach involves departmentalizing RM tasks, and it focuses essentially on hazardous risks. According to Ibrahim and Esa (2017), TRM strategies allow little to no room for relative comparison between risks to ascertain their underlying relationships and assess their cumulative impact on a company’s operations. Contrarily, ERM integrates a holistic approach into the RM process of a firm’s internal controls. Under this RM procedure, every silo, business unit, or department handles its uncertainties and has minimal cognizance of corporate risks.

ERM is a continuous and proactive procedure, whereas TRM is a sporadic and reactive process. The latter does not consider the threats to a company’s objectives and it emerges from a specific event, requiring the management’s response. As a proactive methodology, ERM helps the corporation to stay ahead of the risk and seize the opportunity to attain strategic goals. Conventional RM comprise disjointed activities, is standardized, and focuses on risk aversion. In contrast, ERM is embedded in a company’s culture and employees’ mindset, requires soft skills and assumes a risk-taking approach.

Why ERM is a More Effective Approach for Today’s Organizations

Currently, ERM is regarded as a more efficient and practical risk management approach linked with significant corporate-related benefits due to various reasons. First, ERM institutionalizes a firm’s RM processes by standardizing the methodological strategies, tools, people, and techniques used to monitor or track potential risks. Second, ERM fosters the development of a more risk-focused organizational culture, which, in turn, allows an enterprise to identify and assess threats more comprehensively and decide the risks worth taking (Yang et al., 2018). Third, this RM approach ensures an improved perspective and focus on organizational risks. Fourth, ERM programs do not eliminate the significance of day-to-day RM; instead, it helps improve the tools and frameworks utilized in executing critical RM functions consistently. This, in turn, eradicates redundant processes and enhances efficiency by facilitating the proper allocation of resources for risk mitigation. Ultimately, it promotes the effective coordination of compliance and regulatory procedures.

The Key Drivers of Value-Driven ERM

RM strategy: Before adopting RM conceptualizations, the company must first decide its RM approach, objectives, priorities, and risk governance structure based on its operational complexity, size, and business model.
Risk ownership: It is typically allocated to people charged with performing risk responses.
RM competency: Experts within the enterprise should have the required proficiency sets, training, and experience to appropriately comprehend and execute their duties.
Decision-making: RM should be integrated into the decision-making procedure: therefore, RM professionals must be consulted during the early strategic planning phase.
Day-to-day operations: The RM system should incorporate developing a feasible organizational reporting process and structure to ensure the efficient business plan’s implementation. It should also include communicating procedures and policies and training.
Ongoing monitoring: Depending on pertinent regulatory stipulations and an organization’s business model, complexity, and size, appropriate second-line defense activities must be developed to facilitate the continuous monitoring of actual performance against the established measures and timely reporting.
Periodic monitoring: An internal audit function with appropriate adroitness and adequate resources must be created to conduct perioding monitoring to ensure adherence to procedures and policies.
Board oversight and culture: Effective RM can only be attained with proper risk culture. The board must create guidelines and policies to establish a robust control environment within the company (Yang et al., 2018). It should also set an effective risk appetite for physical threats and assume risk governance roles by developing a proper committee structure to supervise management during RM procedures.

Key Drivers’ Application Within the Healthcare Sector

The ERM’s primary drivers can be applied within the healthcare sector using the following steps:

Step 1: The organization should first decide to manage risks using proactive approaches and later clarify its risk philosophy.
Step 2: They should develop a risk management strategy to comprehend the healthcare setting’s goals and strategy. This phase incorporates ascertaining elements such as corporate objectives, priorities, risk governance structure, required RM competencies and roles, internal control, compliance-related functions, and the reporting lines and positions.
Step 3: This phase involves identifying events likely to impact the institution’s goals adversely. It entails reflecting on the organization’s strategy, primary components, and related objectives using techniques including self-assessment, scenario evaluation, questionnaires, facilitated workshops, interviews, and brainstorming.
Step 4: Identified risks are then assessed by relevant personnel using more sophisticated risk measurement techniques and tools, such as quantitative risk probability analysis techniques and balanced scorecards.
Step 5: This phase involves developing action plans and allocating responsibilities. Each risk should have an owner; for instance, the head nurse informaticist may assume ownership of health information technology (HIT) related risks within the healthcare setting.
Step 6: This phase involves developing utilizing metrics for monitoring the RM process’s efficacy. They include structural measures (proportion of nurses to patients), process measures (the percentage of individuals receiving preventive care), and outcome measures (the rate of hospital-acquired infections).
Step 7: Communicating the identified risks as crucial; this involves providing the hospital’s audit committee and board of directors with regular reports on the hospital’s primary threats.
Step 8: Embedding ERM into the hospital’s organizational culture by integrating insights into the risks identified into the company’s culture. The healthcare setting can also leverage its compliance using the SOX section 404 to enhance ERM’s implementation. To ensure adherence in its accounting department and promote shareholder value via ERM, the management can use the management guideline on “top-down” risks by the SEC.

Conclusion

The RM process assumes two primary forms: traditional and enterprise risk management. ERM is a plan-based corporate approach that aims to identify, evaluate, and prepare for any uncertainties that may interrupt a firm’s operations and objectives. TRM refers to the forecasting and assessment of uncertainties integrated with identifying processes for minimizing or averting their impact. An ERM approach contains several vital drivers which could be implemented to the organization to enhance its success.

References

Anton, S., & Nucu, A. E. A. (2020). Enterprise risk management: A literature review and agenda for future research. Journal of Risk and Financial Management, 13(11), 1–22. Web.

Ibrahim, F. S., & Esa, M. (2017). A study on enterprise risk management and organizational performance: Developer’s perspective. International Journal of Civil Engineering and Technology, 8(810), 184–196. Web.

Yang, S., Ishtiaq, M., & Anwar, M. (2018). Enterprise risk management practices and firm performance, the mediating role of competitive advantage and the moderating role of financial literacy. Journal of Risk and Financial Management, 11, 1–17. Web.

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