Developing an Effective Enterprise Risk Management Framework

Modern business operates in a dynamic and constantly evolving world, with risks lurking around every corner. Organizations need to understand that their enterprise risk management framework and processes must encompass all aspects of the business and manage its changes efficiently over time.

For financial services firms, enterprise risk management (ERM) addresses not only common operational risks (such as accidental forfeitures), but also financial, strategic, legal, and other risk categories to maximize resources, reduce costs, and boost efficiency. ERM is designed to take a forward-looking view of the organization’s risks, objectives, and ability to manage uncertainty.

Setting the Foundation for a Strategic ERM Program

When designing a unified ERM strategy, the discovery process begins with definition and identification. Institutions need to define the outcomes they seek to achieve and identify key pressure points of risks that need to be addressed. Strategic planning should also include delegating roles and responsibilities and determining policy language.

The internal environment encompasses the sentiments of the organization and establishes the foundation and framework for your institution’s risk culture. This includes how risk is viewed and addressed, risk management philosophy and parameters, risk tolerance, and integrity.

Objectives must exist before management can identify potential events affecting their achievement. Building an ERM program ensures that management has consistent processes to set objectives and verify that the chosen objectives support and align with the organization’s strategic mission and risk appetite.

6 Components of an Enterprise Risk Management Framework

To build an effective ERM framework, your organization needs:

1. Event and Risk Identification

Identify internal and external events affecting the achievement of objectives, distinguishing between risks and opportunities.

2. Risk Assessment

Analyze risks and their potential impact, establishing a baseline for deciding how various risks should be managed.

3. Risk Response

Management chooses risk responses and develops a set of actions to align ERM processes with risk tolerances and appetite.

4. Control Activities

Develop and implement policies and procedures to help ensure the risk responses are effectively executed.

5. Information and Communication

Identify, capture, and communicate relevant information through processes and timetables that enable stakeholders to carry out their responsibilities and, if necessary, report to leadership.

6. Continuous Monitoring

Maintain ongoing visibility into your risk landscape through tools and processes that break down data silos and deliver risk intelligence to stakeholders across your institution.

ERM thrives only when program ownership is shared across the entire organization and when core strategic goals are coordinated and communicated across departments. ERM can often feel too far-reaching and difficult to manage for financial institutions. However, a unified enterprise risk management framework built on a flexible technology architecture provides enhanced visibility, controls, procedures, and policies. A technology-enabled ERM program equips institutions with the tools and data they need to improve risk management, avoid compliance penalties, and protect the extended enterprise.

Learn more ERM best practices:

• Series: Top 10 Risk Management Fundamentals for Your ERM Program
• Key Indicators Explained: Making KPIs & KRIs Part of Your Enterprise Risk Management Strategy