The competitiveness of an organization depends on its ability to create value for its stakeholders. The management maximizes the value when objectives and strategies are formulated in order to achieve an optimal balance between growth, profitability and associated risks, using resources in an efficient and effective way. These statements are the basic philosophy of "risk management business”. As seen, all businesses face uncertain events and the challenge of management is to determine the amount of uncertainty acceptable to create value. The uncertainty is both a risk and an opportunity and can potentially reduce or increase the value of the company.
The Enterprise Risk Management (ERM) is the set of processes that deals with the risks and opportunities that have an impact on the creation or preservation of value. ERM is put in place by the Board of Administration, the management and other professionals in an organization to formulate strategies designed to identify potential events that may affect the business, to manage risk within the limits of acceptable risk and to provide reasonable assurance regarding the achievement of business targets. It is an ongoing and pervasive process that involves the whole organization, acted by people of different roles at all levels and throughout the corporate structure, both on its specific assets and on the company as a whole.
This definition is intentionally broad and includes key concepts, critical to understand how companies must manage risk, and provides the basic criteria to apply in all organizations, whatever their nature. The ERM enables to effectively deal with uncertainty, enhancing the company's ability to generate value through the following actions:
- the alignment of strategy at acceptable risk: management establishes the level of acceptable risks in evaluating strategies, setting objectives and developing mechanisms to manage the associated risks;
- the improvement of the response to identified risks: ERM needs a rigorous methodology to identify and select the most appropriate among several alternatives of responses to risks (avoid, reduce, share, accept the risk);
- the reduction of contingencies and resulting losses: companies, increasing their ability to identify potential events, assess the risks and formulate responses, reducing the frequency of unexpected events as well as the subsequent costs and losses.
- the identification and management of multiple and correlated risks: every business needs to face an high number of risks affecting different areas and the ERM facilitates the formulation of a unique response to clusters of risks and associated impacts;
- the identification of opportunities: through the analysis of all possible events, management is able to proactively identify and seize the opportunities that emerge;
- the improvement of capital expenditure: the acquisition of reliable information on risks allows management to effectively assess the overall financial needs, improving the allocation of resources.
These characteristics help management to achieve performance targets without wasting resources. Furthermore, it ensures the effectiveness of reporting in compliance with laws and regulations, so to prevent damages to corporate reputation and relative consequences. Summarizing, the ERM supports organizations to accomplish their goals while avoiding pitfalls and unexpected path.
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