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Enterprise Risk Management (ERM) is the practice of planning, coordinating, executing and handling the activities of an organization in order to minimize the impact of risk on investment and earnings. ERM extends the approach to incorporate not only risks connected with unexpected losses, but also strategic, financial and operational risks.
ERM also may be identified as a risk-based process that is used to manage an enterprise, integrate internal control principles and perform strategic planning. ERM is innovative in that it is geared toward managing the growing requirements of numerous stakeholders who need to realize the broad range of risks faced by complex organizations, helping ensure proper management.
Techopedia Explains Enterprise Risk Management
ERM allows enterprises to meet efficiency and productivity objectives and avoid resource shortages. It also ensures beneficial reporting and compliance with legal guidelines. In general, ERM helps enterprises attain expected objectives by avoiding surprises and pitfalls.
ERM provides enterprises with a framework for managing risks, including:
- Recognizing specific events or instances relevant to the objectives of the organization, such as risks and opportunities
- Evaluating risks with respect to probability and degree of impact
- Establishing response tactics
- Monitoring progress
By recognizing and proactively handling opportunities and risks, enterprises can safeguard and build value for their stakeholders, including entrepreneurs, staff members, clients and regulators.
Advantages of ERM include:
- More potent tactical and operational planning
- Organized risk taking and proactive risk management
- Better decision making and confidence in accomplishing functional and strategic goals
- Improved stakeholder confidence
- Better financing
- Improved organizational strength
- Better management during hindrances and failures, reducing monetary impact
- Provision for future planning to reduce and eliminate surprises
- Establishment of a structured decision-making strategy
