How to Develop an Effective ERM Program and Prove the ROI

October 17, 2023 · READ

Enterprise Risk Management (ERM) has taken a foothold in today’s business environment. Since the enactment of the Sarbanes-Oxley Act of 2002 (SOX), public companies have taken steps to strengthen their internal controls over financial reporting and enhance their ability to comply with rules and regulations.

In response to numerous data breaches over the past two decades, accounting and corporate scandals — as well as increased enforcement of Foreign Corrupt Practices Act of 1977 (FCPA) violations by the U.S. Securities and Exchange Commission and Department of Justice — there has been an increase in corporate boards’ awareness and management’s focus on governance and risk management. Many organizations have turned to ERM as a solution.

Not only does an effective ERM program help minimize risks and reduce the impact and severity of negative events, but it also allows companies to become more efficient, make better decisions based on data and create a risk culture. Mature and successful ERM programs have been shown to reduce earnings volatility, strengthen capital position and increase profitability. However, not all organizations are aware of what it takes to implement and operate a successful ERM program.

In this blog, we will identify what all effective ERM programs have in common, three ways to prove the value of ERM, and how technology like Resolver’s enterprise risk management software plays a critical role in your organization’s risk management efforts.

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4 Elements of an effective ERM program

An effective ERM program typically has several things in common. These elements serve as a comprehensive framework for managing risk in a holistic and integrated manner. By integrating these components into their operations, organizations can proactively navigate uncertainties, seize opportunities, and build resilience, ultimately fostering sustainable success.

These four elements of an effective ERM program allow organizations to systematically identify, assess, mitigate, and monitor risks to achieve their strategic objectives.

Also read: 5 Steps to Reinvigorate Your ERM Program Components

1. Adoption across all departments

We sometimes see ERM programs initiated at the request of the board, CEOs, or as a result of something negative that has happened to the organization. To implement an effective ERM program, it’s crucial to have the support, engagement and buy-in from the C-suite and top managers. There should be an appointed champion at the executive level who will present data and performance to the board of directors or the financial risk committee.

For ERM to stick, it is important to know the “why” of it all and empower people, providing them with the tools they need and giving them the autonomy to own it themselves. This way, it becomes part of the fabric of the business — not something that is imposed, but rather a part of how they get things done. With this approach, the explicit link between the strategy, goals, and objectives of the organization may be missing.

Securing company-wide buy-in from the outset and maintaining stakeholder engagement and accountability are crucial for the success and longevity of an effective ERM program. First and foremost, it fosters a risk-aware culture, making risk management a shared responsibility and encouraging proactive risk identification and mitigation at all levels of the organization.

It also enhances transparency and communication, enabling better-informed decision-making and early risk response. Furthermore, engaged stakeholders provide diverse perspectives on risks and potential solutions, which can lead to more robust risk assessments. Accountability ensures that risk management measures are implemented effectively, creating a continuous improvement cycle that adapts to evolving threats and opportunities.

2. Budgeted resources

Most risk assessment activity takes place when the executive management team has the time to do it — and that is typically not planning and budgeting. Unfortunately, in most organizations, the risk assessment takes place three months after the planning and budgeting are done, which is when teams have time. However, that is not the time you want to do it.

Budgeted resources are vital for a successful, long-term ERM program because they provide the necessary financial support for its sustained effectiveness. These resources ensure that an organization can invest in risk assessment tools, staff training, technology, and risk mitigation initiatives.

Without adequate budgeting, ERM efforts may be underfunded, leading to incomplete risk assessments or inadequate risk mitigation measures, leaving the organization vulnerable to unforeseen threats. A well-funded ERM program, on the other hand, can continuously adapt to changing risks, foster innovation, and enable proactive risk management, ultimately contributing to the long-term resilience and success of the organization.

3. Continuous improvement and evolution

Risks are dynamic and ever-changing. An ERM program that does not adapt becomes obsolete and less effective over time. Those who assume the most ownership of an organization’s ERM program have the task of continuous innovation. They should always be thinking about how they can do things differently.

By continually assessing, refining, and enhancing risk management strategies, organizations can better address emerging threats and seize new opportunities. This iterative process ensures that the ERM program remains relevant and aligned with the evolving business landscape, contributing to the organization’s long-term sustainability and success.

4. Measure results

What does not get measured, does not get managed. Many organizations with strong, mature ERM programs in place say measurement is key. They try to quantify efforts and have leading indicators around risk and performance to show the variables and the delta between the work they are doing versus if they did nothing at all.

By quantifying the impact of risk management efforts, organizations can identify what’s working, what needs improvement, and where resources should be allocated. Measuring results allows for informed decision-making, accountability, and the ability to demonstrate the value of the ERM program to stakeholders. Over time, this data-driven approach helps refine risk strategies and adapt to changing circumstances, ultimately contributing to the program’s long-term success in mitigating risks and supporting the organization’s objectives.

Read more: Key Metrics to Track for an Effective Enterprise Risk Management Program

3 Ways to prove the ROI of ERM  

How can you quantify or demonstrate the value of a program that is supposed to eliminate or mitigate the bad things from happening in the first place? How can you prove the ROI of something that doesn’t happen?

Organizations face critical challenges when seeking to justify their commitment to robust risk management practices. Together, the three methods below offer a comprehensive framework for showcasing the tangible benefits of a well-executed, effective, ERM program.

1. Benchmark against companies with mature ERM programs

By analyzing the performance and outcomes of organizations that have successfully implemented ERM, an organization can assess its progress and effectiveness. This comparative analysis allows for the identification of best practices and areas for improvement, facilitating a more informed evaluation of the ROI on ERM investments.

Additionally, benchmarking against industry leaders can help demonstrate how effective ERM programs contributes to competitive advantage, improved financial performance, and risk mitigation, which can be compelling evidence when justifying the value of ERM to stakeholders and decision-makers.

2. Monitor key metrics

Some of the most important metrics used in valuing an effective ERM program include the total cost of risk, annual loss expectancy, risk coverage ratio, and reputation quotient to provide quantifiable evidence of the program’s impact and demonstrate the tangible benefits of ERM. Measuring these — and many other types of risk metrics — becomes a daunting task when relying upon outdated methods of measurement, like spreadsheets.

Offering a clear before-and-after picture shows how ERM contributes to risk reduction, operational efficiency, and financial outcomes. This data-driven approach not only substantiates the ROI but also helps in refining risk management strategies and justifying ongoing investments, making it an essential aspect of  an effective ERM program evaluation.

3. Leverage technology

Attempting to manage company-wide risks with a series of jumbled, complicated spreadsheets can be a recipe for disaster. Organizations should have a single technology platform in place to streamline the process of identifying, ranking and addressing risks, among other things.

Effective ERM platforms and tools can enable organizations to make more informed decisions and proactively respond to risks. This not only improves risk management effectiveness but also simplifies the process of tracking and reporting on key performance indicators, helping to showcase the program’s tangible contributions to risk reduction, cost savings, and operational efficiency.

Additionally, technology-driven analytics can provide a clear and data-driven picture of how ERM supports strategic objectives, which is essential for proving the ROI and justifying continued investments in the program.

Interested in how Resolver’s enterprise risk management software can help you? Request Your Demo Now

Take advantage of Resolver’s ERM Software

Using dedicated software to manage ERM is a necessity in today’s business environment. An effective ERM program should provide management and end-users with the information they need to understand their risks, make data-driven decisions, and reduce negative impacts. The software must enable risk owners to effortlessly submit risk assessments share data across the entire enterprise, and align to globally accepted risk management principles and frameworks including ISO 31000, Basel, and COSO.

What does the board of directors want to see when it comes to ERM? Most prefer a short, concise list of the top risks, confidence that the ERM program is designed and operating well, and how the program is helping the company achieve its objectives. Your ERM technology should allow users to produce meaningful board-ready reports, gain access to real-time dashboards, promote a risk culture through collaboration, and enable powerful automation. Other key features should include a way to:

  • Manage and track risks across the enterprise
  • Share data across risk, audit, and compliance teams for a holistic view of risks and controls
  • Enable consistent and organized monitoring of events
  • Provide real-time notifications to risk managers and owners when a KRI has been breached
  • Generate customizable reports and shareable dashboards
  • Be easily updatable as compliance and regulations within your industry change
  • Be fully customizable and responsive

With evidence that a company’s financial performance is tightly correlated to the level of integration and coordination across risk, control and compliance functions, many organizations are now actively working to embed a risk culture throughout their business. While the ultimate aim is to fuel better performance and achieve a competitive advantage, many are realizing the wide range of benefits created by an enterprise risk management program, and software is helping them do just that.

Watch our webinar or watch a no-commitment ERM software showcase to learn more.

This content was originally published on July 13, 2019
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