Risks are part of an organization’s day-to-day operations. Often, the difference between triumph and failure is how well an organization prepares for and manages uncertainties, and that’s where Enterprise Risk Management (or ERM) comes in. It’s seen as a more proactive and future-facing approach than traditional approaches, which are often reactive and rear-facing.
Enterprise Risk Management is an organization’s integrated approach to identify, assess, and respond to risks. This ensures that the organization maintains its objectives and prevents potential economic losses. Depending on the response approach, ERM can help an organization stop, avoid, accept, transfer, or share a given risk.
Unlike traditional risk management approaches, which leave the decision-making in the hands of the organization’s heads, ERM outlines just what exactly to do when a given risk pops up. Instead of each department in an organization being responsible for its risk assessment and management, firm-wide oversight is given primacy.
This guide will help you better understand Enterprise Risk Management, especially its framework, strategies, components, and differences (compared to traditional approaches). Let’s dive in!

Key Takeaway:
- Enterprise Risk Management is a strategic tool or approach for identifying, measuring, and managing uncertainties in an organization.
- An Enterprise Risk Management framework describes an organization’s guidelines to manage risks and achieve its objectives.
- Common types of enterprise risks which call for ERM implementation include strategic, security, economic, operation, legal, compliance, and finance risks.
- ERM differs from traditional risk management in scope, risk appetite, reactiveness, leadership, skillset, adaptability, and mindset.
- The five major components of Enterprise Risk Management are risk appetite, risk identification, risk assessment, risk response, and risk monitoring.
- The eight essential steps of Enterprise Risk Management include establishing an internal environment, setting objectives, identifying high-risk events, assessing risks, determining the correct response, instituting internal controls, information capturing and communication, and reviewing ERM efforts.
- The ERM implementation process involves outlining the risk philosophy, creating an action plan, broad thinking, communicating priorities, assigning responsibilities, maintaining flexibility, leveraging technology, and continual monitoring.
- Some of the best ERM strategies include having a single vision, establishing clear responsibilities, observing flexibility, and using real-time data.
- ERM offers several advantages, which include a more guided response, employee satisfaction, better customer experience, fast decision-making, staff efficiency, and improved profitability.
- ERM also suffers from a few shortfalls, including limited assessment of future risks, heavy reliance on management, time-intensiveness, and capital-intensiveness.
- The COSO Framework of ERM is a risk management model with a structured approach that organizations can use to manage uncertainties and protect finances.
- The board of directors is a critical player in ERM, and its roles include providing oversight, policy development, delegation, and review.
What is Enterprise Risk Management (ERM)?
Enterprise Risk Management is a top-down strategy that identifies, evaluates, and prepares an organization for potential risks that may interfere with its objectives or operations and eventually cause losses. Its execution is overseen by an appointed Chief Risk Officer (CRO).
CROs are C-level executives, the same as CEOs (Chief Executive Officers), CFOs (Chief Finance Officers), CIOs (Chief Information Officers), COOs (Chief Operating Officers), and CMOs (Chief Marketing Officers).
ERM adopts a holistic approach and involves management-level decision-making. It’s increasingly utilized across industries, from insurance and finance to construction and manufacturing.
What’s an Enterprise Risk Management Framework?
An Enterprise Risk Management framework encompasses an organization’s practices and procedures to manage anticipated uncertainties and attain its objectives. It safeguards an organization from financial harm while creating opportunities to boost business performance.
Overall, an ERM framework should prioritize these objectives:
- Foster a solid risk culture where employees understand their responsibilities in case of a risk
- Support the organization’s strategic plan
- Protect the organization’s reputation from considerable risks
- Develop the correct risk governance framework
- Comply with all legal regulations the organization operates in
What are the Types of Enterprise Risks?
Enterprise Risk Management addresses several types of risks, which include the following:
- Strategic risks: Strategic risks are threats to an organization’s long-term plans, and they may include future market participants and competitors.
- Security risks: Security risks are issues that threaten the safety of an organization’s physical or digital assets. A perfect example is a cyber-attack, which threatens digital assets. Meanwhile, theft is a physical security risk.
- Economic risks: Economic risks are threats related to the financial market, such as an unsteady stock market and a weakening dollar.
- Operation risks: Operation risks are day-to-day threats that an organization faces, such as Wi-Fi outages, power failures, and failed supply chains, which have the power to ruin the inventory.
- Legal risks: Legal risks are threats an organization faces when violating specific laws. These threats may be penalties and lawsuits following regulatory issues or customer disputes.
- Compliance risks: Compliance risks threaten an organization due to violating specific external requirements or laws. A perfect example is when a company cannot provide timely and accurate accounting statements.
- Finance risks: Finance risks are issues that challenge a company’s financial health and standing and can plunge it into an economic slump.

How Does ERM Differ from Traditional Risk Management?
Enterprise Risk Management (ERM) and Traditional Risk Management (TRM) differ in several ways. Here’s the breakdown:
1. Scope
Ideally, TRM focuses on preventing certain financially tangible, insurable risks and managing associated losses. In this case, a company is compensated when a covered risk occurs.
On the other hand, ERM is more objective-centric and focuses more on non-insurable risks. Instead of helping the company avoid specific risks, it helps it attain its objectives. Each risk is objective-linked, and the only way to stay at the top of things and avoid losses is to meet the organization’s strategic objectives.
2. Risk Appetite
TRM focuses on specific risks within a particular department. Contrariwise, ERM provides a comprehensive view of different risks across different departments within an organization.
In TRM, risks are often not directly tied to the organization’s objectives, so it makes sense to handle them individually. In ERM, however, risks are usually objective-tied or interrelated and thus require multidimensional handling.
3. Reactiveness
Since avoiding risks is nearly impossible, companies must react when it happens. ERM generally takes a proactive approach, focusing on preventing future risks. On the other hand, TRM takes a reactive approach, focusing on an incident that has occurred or is occurring and preventing its recurrence.
4. Leadership
In TRM, one department is responsible for assessing and managing incidents while decisions are determined at the operation level. In contrast, senior leaders take a proactive role in addressing risks in ERM. TRM usually keeps discussions at a departmental or team level, but ERM elevates the conversation to the board level.
5. Skillset
TRM requires technical skills obtained through learning and work experience, such as financial management, computer operations, problem-solving, and data analysis.
On the other hand, ERM requires soft skills such as critical thinking, creativity, discernment, leadership, and persuasion, which are challenging to learn as they are more about personality.
6. Adaptability
TRM takes a standardized approach, while the ERM framework is more adaptable and customizable to the needs of an individual organization. In TRM, the practices have been around for ages, and companies only need to refer to them when facing a similar risk.
In contrast, ERM requires that the guidelines be tailored to suit a particular company. You can’t cut, copy, and paste the framework and expect it to work without addressing a company’s individual needs, as they all have different corporate cultures and risk appetites.
7. Mindset
On one hand, TRM is risk-averse, as it focuses more on mitigating risks. On the other hand, ERM is more risk-tolerant, as it focuses on enterprise-wide management.
What are the 5 Components of Enterprise Risk Management?
Essentially, there are five indispensable pillars around a successful ERM framework, and they are as follows:
1. Risk Appetite
Usually, an organization starts developing its ERM framework by defining how much risk it’s ready to take. That’s what we call risk appetite, and it generally shouldn’t exceed a company’s risk capacity (ability to handle the risks). The organization could suffer severe risk if the risk appetite exceeds the risk capacity. In the worst case, its capital could be wiped out, rendering it insolvent.
2. Risk Identification
A company can only manage the risks it has identified. Thus, the risk identification component is integral in ERM. A company can determine its risk by monitoring its day-to-day operations to pinpoint the exact challenges it faces or could face.
3. Risk Assessment
It’s not just enough to identify risks but also evaluate them. A practical risk assessment involves ranking the risks based on severity, determining how they interact, and weighing in on the likelihood of the risk occurring and the possible impact if it does.
4. Risk Response
Depending on the risk, the company may opt for any of these responses:
- Avoid the risk (if it has no risk appetite)
- Accept it (if it’s not financially worthy to pursue its mitigation efforts)
- Reduce its impact (if the risk is beyond the company’s risk appetite but the company can take some exposure)
- Transfer it (which involves passing it to a third party such as an insurance company)
- Share it (among partners)
5. Risk Monitoring
This last component assures the board of directors and top management that the existing ERM controls and structures are working as expected. However, it still offers an opportunity to make updates and changes.

What are the Essential Enterprise Risk Management Steps?
With the above components in mind, here are eight critical steps to implementing an ERM framework:
Step 1 – Establish an internal environment
The internal environment describes an organization’s corporate culture, risk appetite, and management philosophy. Though it’s typically set by the board or top-level management and communicated across the various departments, it’s often reflected in employees’ actions.
Step 2 – Set Objectives
Once the internal environment is in place, the next thing to set is objectives that support the organization’s goals and align with its risk appetite. In this case, the company defines far-reaching strategies and measures to reach them despite the likelihood of the risks.
Step 3 – Identify high-risk events
In this step, the company pinpoints specific areas where it’s likely to be severely hit. That includes events likely to cause severe losses and operation disruption and those likely to interrupt the organization’s objectives.
Step 4 – Assess risks
Once a company recognizes what could hit it, it has to detail its assessment steps. ERM encourages companies to quantify potential risks in terms of percentage possibility and dollar impact (financial implication).
Step 5 – Determine the correct risk response
A company may choose to respond to different risks differently. As mentioned earlier, the response may involve avoiding, accepting, mitigating, sharing, or transferring the risk.
Step 6 – Institute internal controls
Once the response is in effect, the next step is establishing internal controls, which involve instituting risk management policies and practices. Often, this is where the board of directors come in.
Step 7 – Information capture and communication
Using information systems, the organization should capture valuable risk management data, analyze it, and communicate it to employees.
Step 8 – Review the ERM efforts.
The last step involves reviewing the company’s ERM efforts to gauge the overall performance. This may mean getting feedback from an external auditor or an internal board committee.
How to Implement Enterprise Risk Management Practices
Generally, it takes these quick tips to implement the best ERM practices effectively:
- Outline the risk philosophy: The company shouldn’t just define its possible risks but also how it feels about them. This may call for a strategic discussion between the various departmental heads.
- Create an action plan: Once the risk philosophy is clear, the company should outline its plan for protecting its assets and future after a risk assessment.
- Broad thinking: Though it may sound odd, the company should consider all possible risks and possible responses should they occur.
- Communicate priorities: The company should clearly state and explain the steps for handling high-risk events across the various departments.
- Assign responsibilities: When a risk arises, the company should assign specific roles to specific employees. That makes it easy and fast to address the risk and promotes accountability, as you know who is responsible for what.
- Be flexible: The company should be adaptable to the ever-changing risk landscape. It should address its present risks and those that might crop up soon.
- Leverage technology: The company should use available ERM tools, including Diligent, Metric Stream, Resolver, and CURA, as well as other widespread examples. Such tools help to promote a company’s efforts towards Enterprise Risk Management.
- Monitor continuously: The company should constantly monitor its progress. This is often easy with SMART (specific, measurable, attainable, realistic, and timely) goals.

What are the Best Enterprise Risk Management Strategies?
It takes effective strategies to execute an ERM framework successfully, and here are some suggestions:
- Single visioning: Everyone from the board to the upper management should see a given risk the same way to avoid invoking competing priorities.
- Clear responsibilities: Everyone should have a clear role to be answerable and responsible.
- Flexibility: The company and everyone involved in the ERM project should be adaptable enough to adapt to changing risks.
- Use of real-time data: It’s essential to use real-time metrics to address crises as they help create more reliable reports.
What are the Advantages and Disadvantages of Enterprise Risk Management?
ERM has both advantages and disadvantages, as listed below.
Advantages
Notable advantages of ERM include:
- More guided response: ERM builds an organization’s risk management effort around its corporate culture, offering a more guided response when a risk occurs.
- Employer satisfaction: Employees’ awareness of what to do when a particular risk occurs boosts their overall morale and satisfaction.
- Better customer experience: Customers also like knowing a company has measures to address potential risks when they occur.
- Fast decision-making: A company’s ERM practices and procedures are usually compiled in a report available to the top management. Everything is clear from the response steps to the decision-making, saving much time when facing risk.
- Staff efficiency: ERM ensures a company assigns responsibilities to specific employees who are held accountable for their actions and reduces redundancy.
- Improved profitability: By stopping, avoiding, or mitigating risks, ERM ensures an organization protects its financial assets and enjoys greater profitability.
Disadvantages
On a negative front, here are common disadvantages of ERM:
- Limited assessment of future risks: More often, companies build their ERM strategies around familiar risks (those they have faced in the past) and forget about or pay little attention to potential future risks.
- Heavy reliance on management input and estimates: With ERM heavily relying on management’s contributions and forecast, it may be challenging to accurately assess and address the risks.
- Time-intensiveness: ERM requires careful planning and meticulous resource allocation, which can be time-consuming.
- Capital-intensiveness: The fact that ERM can be time-involving means allocating more resources.
What’s the COSO Framework of ERM?
The word ‘COSO’ stands for Committee of Sponsoring Organizations of the Treadway Commission. The COSO framework is a risk management model that employs a structured approach to improve stakeholder’s trust, decision-making, and risk preparedness.

What’s the Role of the Board of Directors in Enterprise Risk Management?
The board of directors has a clear role in ERM. The board oversees the ERM implementation process, while the CRO handles the execution.
The board is also responsible for developing relevant ERM policies and delegating responsibilities to the CFO and other executives.
Moreover, the board is accountable for making follow-ups, especially with the CFO, and reviewing the entire ERM framework afterwards.
The Wrap!
Enterprise risk management undeniably differs from traditional risk management approaches, but it does work. Its proactive, future-facing approach makes it a worthy consideration for organizations looking to manage risks, achieve their objectives, and prevent massive economic losses.
We at the Center for Corporate Governance understand the need for enterprise risk management, and we encourage corporate heads, especially board of directors, risk management officials, and senior-level executives, to be key players in its implementation. We run a monthly corporate governance training to promote that.
Through our corporate governance program, you can learn about the role of ERM in today’s corporate world, working ERM strategies and practices, and how to choose the best ERM technological solutions and tools and leverage them. You can check out the details of this mastery course on our website!
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