Enterprise risk management has become an imperative for senior management in all industries as a result of several factors, including the risk of terrorism and other catastrophic events. Other factors like new regulations–such as Sarbanes-Oxley in the United States–require managers to demonstrate the ability to control and monitor a broad array of risks.

Senior managers at market-leading organizations view ERM as a way to profit from risk and opportunity and add value to an organization–a more proactive approach that is taking ERM beyond the defensive objectives of the recent past.

Furthermore, in the wake of recent corporate scandals, shareholders, regulators and rating agencies are demanding that senior executives and boards provide greater transparency and better communication of a company's true risk profile. All of these factors are key drivers for senior managers considering ERM important for an organization.

But ERM is much more than a regulatory compliance tool. As top managers gain more experience with ERM, they recognize that taking a comprehensive view of risks across the organization can translate into competitive advantage for companies that do it well.

For instance, addressing ERM as a piece of the overall risk management function allows risk managers to look across all silos of corporate risk to identify possible catastrophes–such as terrorism–and their potential impact on an organization.

In addition, a number of companies are achieving quick wins today by building on existing information and capabilities and implementing ERM in incremental steps.

Many earlier ERM efforts failed because they were driven by individual divisions, functions or silos that did not have the ability to bridge to other areas. What's more, ERM was seen as a costly program that took years to implement and whose benefits were difficult to measure. As a result, very little progress was made. Now that ERM is driven from the top, it's easier for companies to implement changes across various parts of an organization.

Companies now have clearer objectives and are taking a more practical approach to ERM. This approach, often based on using existing “building blocks” of data or tools, achieves early measurable benefits and provides momentum for further risk management activities.

Clearly, organizations are putting together long-term ERM programs and taking an integrated view of how all the pieces work together. They also, however, are prioritizing their objectives and focusing on the risks, processes and tools that will deliver the most bang-for-the-buck early on, while providing a foundation for ERM activities in the long run. (See “Key Points.”)

Before embarking on these activities, companies should prioritize both their defensive and value-adding ERM objectives to form the basis on which both short-term and long-term ERM activities are selected.

The most common objectives include improving risk-based decision making, using capital more effectively, improving and protecting shareholder value, and managing earnings volatility.

There also should be a clear understanding of where tangible benefits are likely to be realized. For instance, ERM can improve decision making and performance in investment strategy, asset-liability management, product pricing, product design, business mix, reinsurance purchasing and strategic planning.

ERM objectives can be achieved by delivering on a series of bite-sized goals. For example, a long-term objective to improve ratings or lower the cost of capital will require the ability to make better risk-based decisions on product mix and reinsurance.

A quick ERM win would be to deliver on a short-term priority that improves the measurement, management and monitoring of key risks. Many of the key risks probably would have been identified through compliance work for Sarbanes-Oxley or for internal audit. That start allows less time to be spent on data collection and more spent analyzing information.

Fast results using the same data also can come from assigning clear accountability to individuals for managing and monitoring these key risks. Doing so develops a risk organization structure that supports key risks and the related management processes.

Increasing shareholder value is the primary purpose of value-based ERM. As such, its long-term objectives should focus on relating risk analysis to the economics of the business. In the insurance industry, leading companies are increasingly using economic capital as a realistic measure of the amount of capital they need to run their business, beyond the accounting and regulatory capital requirements.

An economic capital model of the firm can be used to aggregate risks across business lines and help management understand the diversification benefits of the company's business portfolio. This information can be used to better communicate the real business risks and true capital requirements of the company to a variety of stakeholders–possibly leading to a lower cost of capital for the company.

Market leaders began to focus on ERM before they were required to by regulators. With a mandate from the top, they have prioritized ERM objectives and taken action steps across individual business units.

Soon, ERM will no longer be seen as a long-term, costly program with no measurable value to the organization–it will be an imperative to remain competitive.

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