ERM

Enterprise risk management (ERM) is a comprehensive approach to identifying, assessing, and managing risks across different levels of an organization. Here is an example of how ERM can be applied.

Let’s say a multinational car company operates in various countries and is exposed to political, economic, technological and regulatory risks. As part of their ERM process, the company conducts a risk assessment to identify potential risks in each country and for each product line. They analyse factors such as political stability, currency fluctuations, changes in the various populations’ views on environmental/emissions impacts and changes in regulations that could impact their operations. They might also have identifies a problem with a particular vehicle and they need to deal with risks arising from that. (Although not a car company, think about Boeing and the risks that have arisen from the 737Max aircraft and how the management of quality control risks there was poor so that the risks have tended to contaminate the whole company.)

Based on the risk assessment, the company develops risk management strategies. For example, they may decide to diversify their operations across multiple countries to reduce the impact of political instability in any one country. Of course, they might decide to withdraw from a country if the risks are too great. They may also establish contingency plans and insurance coverage to mitigate the financial risks associated with currency fluctuations. They might decide to invest more resources in electric vehicles.

Of course, based on further investigation they might decide that a specific risk is so unlikely or theoretical that it can be safely ignored.

These various initiatives or events can impact various levels of the company such as: head office, national subsidiaries, R&D and treasury. Each ‘division’ will have its own important set of risks and must respond accordingly.

The company continuously monitors and evaluates the effectiveness of their risk management strategies. They regularly review the political, economic, legal and competitive landscape in each country and update their risk mitigation measures accordingly because not all risks stay the same and they can grow or diminish in importance. By implementing ERM, the company is able to proactively identify and address potential risks, safeguarding their operations and enhancing their long-term success.