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A structured approach to

Enterprise Risk Management (ERM)
and the requirements of ISO 31000

Executive summar y



Part 1: Risk, risk management and ISO 31000

1 Nature and impact of risk

2 Principles of risk management

3 Review of ISO 31000

4 Achieving the benefits of ERM

Part 2: Enterprise risk management

5 Planning and designing

6 Implementing and benchmarking

7 Measuring and monitoring

8 Learning and reporting


A Risk management checklist

B Implementation summary

List of figures

1 Risk architecture, strategy and protocols

2 Framework for managing risk (based on ISO 31000)

3 Risk management process (based on ISO 31000)

4 Risk architecture of a large PLC

5 Drivers of risk management

List of tables

1 Detailed risk description

2 Contents of risk management policy

3 Risk management responsibilities

4 Risk assessment techniques

1 © AIRMIC, Alarm, IRM: 2010

in the case of public often referred to as the ‘upside of risk’. This guide provides a brief commentary on ISO Since that time. products and services. more accurate activities. enhanced political and community support. the expected benefits of the risk management initiative should be established in advance. Risk may be a A successful enterprise risk management (ERM) driver of strategic decisions. ISO 31000 ‘Risk management – of the guide is to: Principles and guidelines’.  provide a brief overview of the requirements of ISO 31000 Intended benefits of risk management  give practical guidance on designing a For all types of organisations. The outputs from successful risk management include compliance. financial reporting. service organisations. These outputs will provide benefits by way of improvements in the efficiency of operations. 2 A structured approach to Enterprise Risk Management . as well as embedded in the activities of the organisation. new risk management standards 31000 as well as setting out advice on the have been published. Implementing a comprehensive approach will improved perception of the organisation. successful delivery of change and enables an organisation to consider the potential increased operational efficiency. it may be a cause of initiative can affect the likelihood and uncertainty in the organisation or it may simply be consequences of risks materialising. Other benefits impact of all types of risks on all processes. The purpose standard. It is important for organisations to recognise and prioritise significant risks and identify the weakest critical controls. effectiveness of tactics (change projects) and the efficacy of the strategy of the organisation. When setting out to improve risk management performance. Organisations need to understand the enterprise risk management overall level of risk embedded within their processes and activities. better result in an organisation benefiting from what is marketplace presence and. Executive summar y Risk management is an increasingly important Purpose of this guide business driver and stakeholders have become much more concerned about risk. including the international implementation of an ERM initiative. there is a need to suitable framework understand the risks being taken when seeking to achieve objectives and attain the desired level of  give practical advice on implementing reward. competitive advantage. stakeholders. An deliver benefits related to better informed strategic enterprise-wide approach to risk management decisions. include reduced cost of capital. assurance and enhanced decision-making. The global financial crisis in 2008 demonstrated the importance of adequate risk management. This guide draws  describe the principles and processes of together these developments to provide a risk management structured approach to implementing enterprise risk management (ERM).

A successful risk management initiative BSI Customer Services for hardcopies only: Tel: should be proportionate to the level of risk in the +44 (0)20 8996 9001. Figure 4. Introduction This guide is the result of work by a team drawn COSO ERM framework and ISO 31000 from the main risk management organisations in the UK – the Association of Insurance and Risk The Committee of Sponsoring Organizations of Managers (AIRMIC). In the public sector. The impact or benefits associated with these outputs include more efficient operations. the public sector risk the Treadway Commission (COSO) published an management association (Alarm) and the Institute Enterprise Risk Management (ERM) standard in of Risk Management (IRM). However. management practitioners and it provides a Throughout the guide. There are many opinions regarding what risk management involves. publishing ISO initiative to deliver outputs. ISO also produced Guide this guide recognises that risk has both an upside 73 ‘Risk management – Vocabulary – Guidelines and downside. It has gained signify the decision-making body within an considerable influence because it is linked to the organisation. how it should be This guide provides a structured approach to implemented and what it can achieve. for use in standards’. At the same time as implementation of risk management. Table 2. Appendix A provides a checklist of actions that should be completed in order to fully satisfy risk management requirements. These benefits need to be measurable and or by contacting context. e-mail: organisation (as related to the size. the word Board is used to framework for undertaking ERM. implementing risk management on an enterprise- International Organisation for Standardisation (ISO) wide basis that is compatible with both COSO standard 31000 was published in 2009 and seeks ERM and ISO 31000.bsigroup. assurance to stakeholders regarding the management of risk and improved decision- complexity of the organisation). as well as international standard and many organisations providing further information on the successful have international operations. aligned with other corporate activities. 3 A structured approach to Enterprise Risk Management . comprehensive in its scope. it needs to be by the BSI. this body may Sarbanes-Oxley requirements for companies listed be referred to as the Council. Limited from “Fundamentals of Risk Management” (2010) ISBN 978 0 7494 5942 0 This approach will enable a risk management www. Executive or in the United States. The guide is intended 2004. Figure 1. ISO 31000 was published in Authority. Also. the guide places to answer these questions. nature and cservices@bsigroup. Risk management principles Acknowledgements Permission to reproduce extracts from ISO 31000 Risk management is a process that is under- ‘Risk management – Code of practice’ is granted pinned by a set of principles. This guide includes a more emphasis on ISO 31000 because it is an brief commentary on ISO 31000. 2009 as an internationally agreed standard for the implementation of risk management principles. Importantly. British Standards can be obtained in supported by a structure that is appropriate to the PDF or hard copy formats from the BSI online organisation and its external environment or shop: www. including compliance with applicable governance requirements. Table 3 and Table 4 are embedded into routine activities and dynamic by reproduced with kind permission of Kogan Page being responsive to changing circumstances. The COSO ERM cube is well known to risk to be applicable to all types of organisations. effective tactics and efficacious strategy.

medium and long term. from the expected. risk management and ISO 31000 Part 1 provides an overview of risk and risk Definition of risk management with particular reference to ISO 31000. virus attacks and operator errors. Risks within the project need to be managed. Even when fully organisation. tactics and strategy. and correct procedures will need to be designed and implemented to minimise potential disruption. loss of data. The terminology used to describe the There are many definitions of risk and risk steps in the risk management process is not management. and the strategic planning horizon stated. it is possible to achieve an upside in the execution of the project. when the objectives of the organisation are Strategy sets out the long-term aims of the comprehensive and fully stated. acquisitions and product developments. These risks are related to this definition of risk can most easily be applied operations. Tactics define how an organisation intends are based should be tested. The definition set out in ISO Guide consistent and this part reflects on these 73 is that risk is the “effect of uncertainty on difficulties. the objectives themselves need to be for an organisation will typically be 3. It is also possible that the IT hardware and software will deliver greater benefits than anticipated. The associated risks are strategic risks and these risks will be taken with the intention of achieving benefits. Once the new hardware and software has been installed. the system will be vulnerable to operational risks. If these choices are incorrect. The project to install the new hardware and software will be a change initiative that represents the tactics by which strategy will be implemented. Therefore. 5 or more challenged and the assumptions on which they years. including computer breakdown. Operations are the routine activities of the organisation. This definition links risks to objectives. Guide 73 also states that an ensure good standards of risk governance are effect may be positive. so that the project is delivered on time. Therefore. These operational risks may be very significant. 4 A structured approach to Enterprise Risk Management . Part 1: Risk. the consequences will not be obvious for some time. For example. respectively. Again. typically associated with projects. The choice of hardware and software are strategic decisions. A summary of the risk management objectives”. negative or a deviation presented by way of a checklist in Appendix A. Correct strategic decisions deliver benefits that result in achievement of the upside of risk. Nature and impact of risk consequence. tactical risks are management process. mergers. In order to assist with the application requirements that should be in place in order to of this definition. Risks can impact an organisation in the short. as part of the risk to achieve change. within budget and to specification. a change in circumstances or a 1. consider the infrastructure of an organisation and the implementation of a new IT system. whereby the project is delivered early and below budget. and that risk is often described by an event.

tolerance or limits for the risk 8 Risk response. their size. Risk classification systems are important negative (hazard risks). there are circumstances An important part of analysing a risk is to where a detailed risk description may be required determine the nature.Recording risk assessments For example. universally applicable to all types of organisations. The objective of a template is to possible to prioritise or rank the key risks for enable the information to be recorded in a table. including description of the events. tactics and operations are most associated with these different risks. appetite  Loss potential and anticipated financial impact of the risk or attitude  Target for control of risk and desired level of performance  Risk attitude. spreadsheet or a computer-based system. However. A risk classification need to establish appropriate definitions for the system will also enable an organisation to identify different levels of likelihood and consequences which strategies. positive (opportunity risks) because they enable an organisation to identify or may result in greater uncertainty. treatment  Existing control mechanisms and activities and controls  Level of confidence in existing controls  Procedures for monitoring and review of risk performance 9 Potential for risk improvement  Potential for cost-effective risk improvement or modification  Recommendations and deadlines for implementation  Responsibility for implementing any improvements 10 Strategy and policy  Responsibility for developing strategy related to the risk developments  Responsibility for auditing compliance with controls 5 A structured approach to Enterprise Risk Management . and their expectations 5 Risk evaluation  Likelihood and magnitude of event and possible impact or consequences should the risk materialise at current level 6 Loss experience  Previous incidents and prior loss experience of events related to the risk 7 Risk tolerance. timescale of potential impact and description as hazard. it will be be recorded. measures of likelihood of occurrence and there is no risk classification system that is consequences. appetite. control. Table 1: Detailed risk description 1 Name or title of risk  Unique identifier or risk index 2 Scope of risk  Scope of risk and details of possible events. reputational Organisations will need to define their own exposure and commercial activities. Risk assessment involves the identification of risks medium or low. type and number 3 Nature of risk  Classification of risk. Evaluation of risks in this way may be assessment process. Table 1 5 risk matrix is required. source or type of impact of in order to facilitate a comprehensive risk the risk. opportunity or uncertainty 4 Stakeholders  Stakeholders. operational efficiency. risk register. Risk ranking vulnerable. both internal and external. many organisations find that assessing likelihood and consequences as high. Although a simple description of a risk is Risk classification systems sometimes sufficient. with the results presented on a 3 x followed by their evaluation or ranking. Organisations accumulations of similar risks. further analysis. semi-quantitative or qualitative Risk classification systems are usually based on in terms of the likelihood of occurrence and the the division of risks into those related to financial possible consequences or impact. enhanced by the use of a risk classification The consequences of a risk materialising may be system. Other organisations find important to have a template for recording that more options are necessary and a 4 x 4 or 5 x appropriate information about each risk. can be quantitative. It is 3 risk matrix is adequate. By considering the shows the range of information that may need to likelihood and consequences of each risk.

The objective is to achieve management process.  responding to significant risks It should methodically address all the risks associated with all of the activities of the  tolerate organisation. a structure the level of risk in the organisation. Risk management must be integrated into the culture of the organisation and this will include There are many risk classification systems mandate. There are organisation. aligned with is required. 2: Principles of risk management Achieving a good risk aware culture is ensured by Risk management is a central part of the strategic establishing an appropriate risk architecture. for  reporting and monitoring risk performance outsourced service providers. scope. The focus of risk management is the assessment This structure is designed to give context to risk of significant risks and the implementation of management activities and support the risk suitable risk responses. 6 A structured approach to Enterprise Risk Management . briefly describes the key features of each element. ISO 31000 does not recommend a specific risk and operational objectives. It should support accountability. comprehensive in its the risk management context. It increases the probability of alternative descriptions of this process. leadership and commitment from the available and the one selected will depend on the Board. for health and safety risks. the range of risks that it faces. maximum sustainable value from all the activities Risk management process of the organisation. the consequences can only be negative and the  reaction planning management of safety risk should focus on prevention and mitigation of harm. This and the level of uncertainty associated with list represents the 7Rs and 4Ts of (hazard) risk achieving the objectives of the organisation. performance measurement and reward. whereby organisations methodically address the risks attached to their activities.This may be especially true for organisations Risk aware culture operating in the public sector and those involved in the delivery of services to the public. and circumstances. but the success and reduces both the probability of failure components listed below are usually present. threats to  transfer success (downside) or an increased degree of  terminate uncertainty. management of any organisation. In all types of undertaking. setting good  reviewing the risk management standards of health and safety may be part of framework winning contracts and this demonstrates that there is an upside to safety risk management. embedded into routine activities and Figure 1 illustrates a suitable structure in terms of dynamic by being responsive to changing the risk architecture. management: Context for risk management  recognition or identification of risks Risk management should be a continuous  ranking or evaluation of risks process that supports the development and implementation of the strategy of an organisation. Risk management enhances the understanding of the potential upside and The risk management process can be presented downside of the factors that can affect an as a list of co-ordinated activities. A successful risk In order to successfully implement. and assign risk classification system and each organisation will management responsibilities throughout the need to develop the system most appropriate to organisation. strategy and protocols. It is the process strategy and protocols. nature and complexity of the organisation. thus promoting operational efficiency at all levels. support and management initiative should be proportionate to sustain the risk management process. ISO 31000 refers to this structure as other corporate activities. It must translate risk strategy into tactical size.  resourcing controls It is often argued that. there is  treat the potential for events that constitute opportunities for benefit (upside). However.

responsibilities. attitudes roles. It includes the essential steps in the out the objectives that risk management activities implementation and ongoing support of the risk in the organisation are seeking to achieve. An organisation will be applied in combination. management process. tools and techniques that should be used Recognition and ranking of risks together form the Framework for managing risk risk assessment activity. Finally. treat. The risk strategy should set framework. appetite. continuity planning and disaster recovery planning.Figure 1: Risk architecture. For many risks. as well as specifying the risk management methodologies. strategy and protocols Risk architecture Risk strategy  Risk architecture specifies the  Risk strategy. transfer process. 7 A structured approach to Enterprise Risk Management . Figure 3 also indicates that the risk management process takes place within the risk management context of the organisation.  design of framework 4: Achieving the benefits of ERM  implement risk management Figure 3 provides a simplified version of the risk  monitor and review framework management process from ISO 31000 using the terminology of Guide 73. Figure 2 individuals and committees that support the risk provides a simplified version of this implementation management process. The initial component of the risk protocols describe the procedures by the ISO 31000 framework is ‘mandate and which the strategy will be implemented and risks commitment’ by the Board and this is followed by: managed. The implementing risk management. the risk. rather than a scope of risk responses available for hazard risks framework for supporting the risk management includes the options of tolerate. ISO 31000 describes the components of a risk It also sets out the roles and responsibilities of the management implementation framework. ISO 31000 uses the phrase ‘risk treatment’ to include all of the 4Ts ISO 31000 describes a framework for included under the heading ‘risk response’. The key stages in the  improve framework process are represented as risk assessment and risk treatment. For opportunity risks. strategy and protocols 3: Review of ISO 31000 shown in Figure 1 represent the internal arrangements for communicating on risk issues. The risk architecture. Reaction planning includes business strategy and protocols for the organisation. and philosophy are defined in the communication and risk reporting Risk Management Policy structure Risk management process Risk protocols  Risk protocols are presented in the form of the risk guidelines for the organisation and include the rules and procedures. these responses may set out in detail in ISO 31000. Information on designing the framework or terminate the risk or the activity that gives rise to that supports the risk management process is not the risk. describe its framework for supporting risk the range of available options includes exploiting management by way of the risk architecture.

which the risk will either be eliminated or reduced by the proposed control measures. However. but extends further to. This requires an intimate knowledge of the organisation. political and cultural environment in which it exists. describes the primary applicable laws and must implement a system of control mechanisms in place and indicates where controls that achieves compliance. It should be approached in a example. for objectives. This ranks the relative importance of each identified risk. treat. the Risk treatment market in which it operates. risk avoidance. Any system of risk treatment should activities within the organisation have been provide efficient and effective internal controls. decreased or reapportioned. Risk treatment is presented in ISO 31000 as the as well as an understanding of strategic and activity of selecting and implementing appropriate operational objectives. The cost- The result of the risk analysis can be used to effectiveness of internal control relates to the cost produce a risk profile that gives a rating of of implementing the control compared to the risk significance to each risk and provides a tool for reduction benefits achieved. An organisation may decide that there Risk identification establishes the exposure of the is also a need to improve the control environment. This Compliance with laws and regulations is not an process allows the risks to be mapped to the option. One method of the level of investment in controls might be obtaining financial protection against the impact of increased. it should be recognised that some The risk analysis activity assists the effective and losses or elements of a loss may be uninsurable. This will include knowledge control measures to modify the risk. efficient operation of the organisation by identifying such as uninsured costs and damage to employee those risks that require attention by management. prioritising risk treatment efforts. transfer and terminate. This will facilitate the ability to prioritise risk control actions in terms of their potential to benefit the organisation.Figure 2: Framework for managing risk (based on ISO 31000) Mandate and commitment Design of framework  Organisation and its context  Risk management policy  Embedding risk management Implement risk management Improve framework  Implement framework  Implement RM process Monitor and review framework Risk assessment treatments include tolerate. morale and the reputation of the organisation. social. risk and opportunities related to the achievement of control (or mitigation). risk transfer and risk methodical way to ensure that all value-adding financing. The range of available risk response 8 A structured approach to Enterprise Risk Management . Risk of the factors critical to success and the threats treatment includes as its major element. An organisation must understand the business area affected. risks is through risk financing. organisation to risk and uncertainty. the legal. including insurance. evaluated and all the risks flowing from these Effectiveness of internal control is the degree to activities defined.

and learns from experience. These are monitoring monitoring and review feedback activities set out and review of performance and communication in ISO 31000 do not explicitly mention the tasks of and consultation.Feedback mechanisms Reporting and disclosure are only very briefly mentioned in ISO 31000 and they are not included ISO 31000 recognises the importance of feedback in the process shown in Figure 3. Communication and consultation is presented in ISO 31000 as part of the risk management process. Also. but it may also be considered to be part of the supporting framework. Figure 3: Risk management process (based on ISO 31000) Establish context Communication and consultation Risk assessment Monitoring and review Risk identification Risk analysis Risk evaluation Risk treatment 9 A structured approach to Enterprise Risk Management . Monitoring and review ensures monitoring risk performance and reviewing the risk that the organisation monitors risk performance management framework. the by way of two mechanisms.

is provided in Appendix B. Keeping the risk management policy up to date demonstrates that risk management is a dynamic activity fully supported by the Board. Unless this mandate and commitment are forthcoming. Figure 4 illustrates a typical risk initiative. and high-profile. and protocols should be recorded in a risk management policy for the organisation. Table 2: Contents of risk management policy A risk management policy should include the following sections:  Risk management and internal control objectives (governance)  Statement of the attitude of the organisation to risk (risk strategy)  Description of the risk aware culture or control environment  Level and nature of risk that is acceptable (risk appetite)  Risk management organisation and arrangements (risk architecture)  Details of procedures for risk recognition and ranking (risk assessment)  List of documentation for analysing and reporting risk (risk protocols)  Risk mitigation requirements and control mechanisms (risk response)  Allocation of risk management roles and responsibilities  Risk management training topics and priorities  Criteria for monitoring and benchmarking of risks  Allocation of appropriate resources to risk management  Risk activities and risk priorities for the coming year 10 A structured approach to Enterprise Risk Management . 5: Planning and designing identify the risk priorities and ensure that appropriate attention is paid to emerging risks. A brief description of the steps ensures that the overall risk management approach involved in the implementation of an ERM initiative is in line with current best practice. Table 2 Mandate and commitment from the Board is provides information on the contents of a typical critically important and it needs to be continuous risk management policy. The There are a number of factors that should be policy should also describe the risk architecture of considered when designing and planning an ERM the organisation. It also gives the organisation the opportunity to focus on the intended benefits for the coming year. strategy architecture of a large listed company. This risk management. Part 2: Enterprise risk management Part 2 provides an overview of the steps involved in Board mandate and commitment the implementation of an enterprise risk management (ERM) initiative. the risk management initiative will be unsuccessful. Details of the risk architecture. The terminology used Many organisations issue an updated version of in this part is based on the 7Rs and 4Ts of (hazard) their risk management policy each year.

review risk controls and procedures management activities and compile the group risk register  Consider materiality of information disclosed to external parties  Receive reports from business units and make reports and recommendations to the Board  Track RM activity in the business units and keep the risk management context under review Business units  Produce specific policy statements. Disclosures Committee risk attitudes and risk exposures  Review and evaluate disclosure  Receive reports from business units. The Figure 4: Risk architecture of a large PLC The Board Audit Committee  Overall responsibility for risk  Receive routine reports from GRMC management  Set annual audit programme and priorities  Ensure risk management is  Monitor progress with audit recommendations embedded into all processes and activities  Provide risk assurance to the Board  Review group risk profile  Oversee RM structures and processes Group Risk Management Committee (GRMC)  Formulate strategy and policy based on risk appetite. as it develops. introducing enhanced stakeholders in the organisation. standards of risk management is a progressive process that cannot be achieved instantaneously. it is necessary for an organisation to decide the scope of the ERM initiative.Scope of the initiative scope of the initiative will be defined by the range of benefits the organisation is seeking to achieve and this In order to be successful. Therefore. as necessary Direct and monitor  Prepare and update the business unit risk register Reports for evaluation  Set risk priorities for business unit  Monitor projects and risk improvements  Prepare reports for GRMC  Manage control risk self-certification activities 11 A structured approach to Enterprise Risk Management . the ERM initiative needs to will be influenced by the expectations of the various be comprehensive. However.

The role of the internal audit for determining the strategic direction of the function will also differ from one organisation to organisation and creating the context for risk another. Table 3: Risk management responsibilities 1. The Board has responsibility management department. to a single risk champion. accept and implement RM processes  Report inefficient. the risk extensive. In determining the most appropriate role for management. unnecessary or unworkable controls  Report loss events and near miss incidents  Co-operate with management on incident investigations 4. Table 3 sets out examples of the risk management function may range from a part-time risk management responsibilities that may be allocated in a manager. RM responsibilities for individual employees:  Understand. RM responsibilities for specialist risk management functions:  Assist the company in establishing specialist risk policies  Develop specialist contingency and recovery plans  Keep up to date with developments in the specialist area  Support investigations of incidents and near misses 6. RM responsibilities for the risk manager:  Develop the risk management policy and keep it up to date  Document the internal risk policies and structures  Co-ordinate the risk management (and internal control) activities  Compile risk information and prepare reports for the Board 5. RM responsibilities for the CEO / Board:  Determine strategic approach to risk and set risk appetite  Establish the structure for risk management  Understand the most significant risks  Manage the organisation in a crisis 2. RM responsibilities for the business unit manager:  Build risk aware culture within the unit  Agree risk management performance targets  Ensure implementation of risk improvement recommendations  Identify and report changed circumstances / risks 3. manager. There need to be arrangements in place internal audit. the organisation needs to ensure that the to achieve continuous improvement in performance independence and objectivity of internal audit are not and this responsibility is likely to be allocated to the risk compromised. to a full-scale risk typical large organisation.Risk management framework The range of risk management responsibilities that need to be allocated in the policy will be broad and Depending on the nature of the organisation. RM responsibilities for internal audit manager:  Develop a risk-based internal audit programme  Audit the risk processes across the organisation  Receive and provide assurance on the management of risk  Report on the efficiency and effectiveness of internal controls 12 A structured approach to Enterprise Risk Management .

Another important part of the risk suitable and sufficient risk assessments. the length of be undertaken and further risk assessments disruption may be a suitable test. risks can be benchmarked in terms of the profile Finally. It is at this stage of the risk management process. an organisation needs to undertake description. Establish risk assessment procedures Undertake risk assessments Risk assessment will be required as part of the An organisation should develop benchmarks to decision-making processes intended to exploit determine the significance (or materiality) of the business opportunities. likely impact of the event on share price. In order to that an organisation will decide the level of detail achieve a comprehensive risk management that will be recorded about each risk in the risk approach. One way of ensuring that identified risks. Table 4: Risk assessment techniques Technique Brief description  Questionnaires and checklists Use of structured questionnaires and checklists to collect information to assist with the recognition of the significant risks  Workshops and brainstorming Collection and sharing of ideas and discussion of the events that could impact the objectives.6: Implementing and benchmarking Other considerations relevant to undertaking risk assessments include decisions on how the risk Risk assessment is a fundamentally important part assessments will be recorded. The nature of these benchmark risk is part of business decision-making is to tests will depend on the type of risk. A range assessment procedures will be the identification of of the most common risk assessment techniques the risk classification system to be used by the is set out in Table 4. Reputational should be undertaken throughout the project. a sum of money can be used as the strategy papers presented to the Board. organisation. risk assessments are also required in that the report of the event would receive. Likewise. stakeholder expectations or key dependencies  Inspections and audits Physical inspections of premises and activities and audits of compliance with established systems and procedures  Flowcharts and dependency Analysis of processes and operations within the analysis organisation to identify critical components that are key to success  HAZOP and FMEA approaches Hazard and Operability studies and Failure Modes Effects Analysis are quantitative technical failure analysis techniques  SWOT and PESTLE analyses Strengths Weaknesses Opportunities Threats (SWOT) and Political Economic Social Technological Legal Environmental (PESTLE) analyses offer structured approaches to risk recognition 13 A structured approach to Enterprise Risk Management . For financial ensure that a risk assessment is attached to all risks. the relation to routine operations. or the impact on the political and financial support received from key stakeholders. For risks that can risk assessment of all proposed projects should cause disruption to operations. benchmark test of significance.

However. Figure 5: Drivers of risk management FINANCIAL RISKS INFRASTRUCTURE RISKS ACCOUNTING STANDARDS COMMUNICATIONS INTEREST RATES TRANSPORT LINKS FOREIGN EXCHANGE SUPPLY CHAIN FUNDS AND CREDIT TERRORISM NATURAL DISASTERS PANDEMIC INTERNAL CONTROL FRAUD RECRUITMENT HISTORICAL LIABILITIES PEOPLE SKILLS INVESTMENTS HEALTH AND SAFETY CAPEX DECISIONS PREMISES LIQUIDITY AND CASHFLOW IT SYSTEMS M&A ACTIVITY BRAND EXTENSIONS R&D ACTIVITIES BOARD COMPOSITION INTELLECTUAL PROPERTY CONTROL ENVIRONMENT CONTRACTS ECONOMIC ENVIRONMENT PRODUCT RECALL TECHNOLOGY DEVELOPMENTS CSR COMPETITION PUBLIC PERCEPTION CUSTOMER DEMAND REGULATOR ENFORCEMENT REGULATORY REQUIREMENTS COMPETITOR BEHAVIOUR MARKETPLACE RISKS REPUTATIONAL RISKS 14 A structured approach to Enterprise Risk Management . it will then classification system and it provides examples of be possible to identify the appetite or attitude to internal and external key risk drivers. Finally. Some risk that type of risk. the FIRM Risk organisation can determine the overall exposure to Scorecard approach suggests that strategic (as the particular type of risk under consideration. procedures and decided the benchmark test of Figure 5 is based on the FIRM Risk Scorecard risk significance for different classes of risks.Having identified suitable risk assessment Internal and external factors can give rise to risks. together with the capacity of the classification systems have strategic risk as a organisation to withstand that risk. well as tactical and operational) risks should be identified under all four headings. the separate category.

In extent to which risk management tasks are aligned practice. and assessment of the has no appetite for causing injury and ill health. This activity normally extends to the development and testing of business continuity 7. This will enable the internal audit function to monitor the Embed risk aware culture existing controls and monitor the implementation of any necessary additional controls. It should be viewed as a risk action should be recorded in the risk register by way of a plan that includes details of the current controls risk action plan. At operational level. There is an overriding need to keep these plans up to date so It is frequently the case that risk assessments are that the preparedness of the organisation to cope recorded in a risk register. effectiveness of existing controls is to ensure that there is adequate evaluation of the business These further actions should be written as continuity planning and disaster recovery planning auditable actions that must be completed within a arrangements in place. defined timescale by identified individuals. procedures are understood and followed. risk appetite is a driver of strategic preparedness of the organisation. this may need to be developed with other corporate activities. At executive level. as well as routine monitoring of risk activities. It evaluation of the risk aware culture and the risk is fairly easy for an organisation to confirm that it management framework. it is surprising performance indicators. 15 A structured approach to Enterprise Risk Management . additional controls. although it is included in most other Monitoring the preparedness of the organisation to risk management standards and stock exchange cope with major disruption is an important part of listing requirements. The scope of risk decisions. Changes within the organisation and the external business environment must be identified. Monitoring and measuring extends to the evaluation of culture. Despite its importance. An important part of evaluating the and details of any further actions that are planned. The resources Changes in the organisation and the environment required to implement the risk management policy in which it operates must be identified and should be clearly established at each level of appropriate modifications made to protocols. and some existing controls should also be monitored. There is no standard with the identified risk events is assured. Measuring and monitoring plans and disaster recovery plans. The risk register should not become a identification of risk improvement static record of the significant risks faced by the recommendations. the cost-effectiveness of the taking in respect of all types of risk. risk appetite embedding of risk management activities in the dictates operational constraints for routine organisation. There is a danger that risk appetite Evaluate existing controls statements fail to be dynamic. however. into a set of targets for health and safety performance. organisations have produced a risk appetite Additionally. These recommendations organisation. format for a risk register and the organisation should establish a suitable format for this important Evaluation of the existing controls will lead to the document. and they can constrain behaviour and rapid response. so that existing procedures can be modified. management and within each business unit. Risk Monitoring activities should provide assurance that management should be embedded within the there are appropriate controls in place and that the strategic planning and budget processes. risk management. that the concept of risk appetite is not mentioned in ISO 31000. monitoring and measuring includes statement that is applicable to all classes of risk. risk appetite activities covered by monitoring and measuring translates into a set of procedures to ensure that also includes monitoring of risk improvement risk receives adequate attention when making recommendations and evaluation of the tactical decisions. performance and At Board level.Risk appetite and tolerances As well as monitoring the effectiveness of the existing controls and the implementation of It is important that the Board sets rules for risk.

16 A structured approach to Enterprise Risk Management . there will be an obligation on communication on risk issues. Monitoring of risk objectives. Learning from lessons can be learned that will assist with improving experience requires more than evaluation of the the design of the support framework and the risk performance indicators. implementation framework. A initiative should have been clearly established. In and monitoring risk performance and undertaking particular. setting out its risk management unable to evaluate whether the contribution was in policies and the effectiveness in achieving its line with expectations. However. indicators and measure the contribution that enterprise risk management has made to the External reporting should provide useful information success of the organisation. a major source of risk  lessons can be learned for future assurance for the Board will be self-certification. External risk reporting is of learning from experience and reporting on designed to provide external stakeholders with performance.Any monitoring and measuring process should also An annual review of the risk management determine whether: framework will be necessary. health appropriateness of the control mechanisms that and safety. strategy and protocols. human rights. and the environment.  the procedures adopted were efficient Other features of learning from experience include  sufficient information was available for the evaluation of audit reports and an assessment of risk assessments the sources of risk assurance available to the Board and the audit committee. Important committee will be vitally important. In order to learn from experience. including evaluation of the risk architecture. as well environment that can demonstrate leadership from as information about learning from incidents. organisations to report externally. employment practices. stakeholders look to performance indicators should include an organisations to provide evidence of appropriate evaluation of the contribution being made by risk corporate behaviour in such areas as community management. assessments and controls such as a Control Risk Self Assessment process that provides assurance regarding risk Embedding risk management involves an management. Risk reporting provides information on historical Monitor risk performance losses and trends. 8. If company needs to report to its stakeholders on a this has not been done. involvement of staff at all levels. a culture of learning from experience. Learning and reporting these external reports are produced in response to mandatory requirements related to risk Completing the feedback loop on the risk management and internal control. An evaluation of  improved knowledge would have helped the level of assurance that has been obtained is to reach better decisions also necessary. Increasingly. as well as an evaluation of the affairs. Often. have been selected. There is a clear difference between measuring stakeholders both internally and externally. risk reporting and disclosure. It is  the measures adopted achieved the important that the organisation has a risk-based intended result audit plan and undertakes appropriate risk reviews. an assurance that risks have been adequately organisation needs to review risk performance managed. the organisation will be regular basis. Increasingly. risk disclosure is a more Learning the lessons from risk management also forward-looking activity that anticipates emerging requires investigation of the opinions of key risks. such as Turnbull management process involves the important steps and Sarbanes-Oxley. Report risk performance appropriate accountability for actions (without In addition to internal communication and developing an automatic blame culture) and good reporting. to stakeholders on the status of risk management and the actions that are being taken to ensure The reasons for undertaking the risk management continuous improvement in performance. the opinion of internal audit and steps to learn from experience to improve the risk evaluation of risk management activities at audit management process and framework. senior management.

together with risk escalation procedures  Business continuity plans and disaster recovery plans established and regularly tested  Arrangements in place to audit the efficiency and effectiveness of the controls in place for significant risks  Arrangements in place for mandatory reporting on risk. with modifications as appropriate  Suitable and sufficient risk assessments completed and the results recorded in an appropriate manner  Procedures to include risk as part of business decision-making established and implemented  Details of required risk responses recorded. together with the critical controls required  Risk management action plan established that includes the use of key risk indicators. tolerance and constraints  Risk architecture and risk escalation procedures  Risk aware culture currently in place  Risk assessment arrangements and protocols  Significant risks and key risk indicators  Critical controls and control weaknesses  Sources of assurance available to the Board 17 A structured approach to Enterprise Risk Management . as appropriate  Necessary resources identified and provided to support the risk management activities Risk protocols  Appropriate risk management framework identified and adopted. risk culture and philosophy  Key dependencies for success identified. including reports on at least the following:  Risk appetite. together with the matters that should be avoided  Business objectives validated and the assumptions underpinning those objectives tested  Significant risks faced by the organisation identified. together with arrangements to track risk improvement recommendations  Incident reporting procedures established to facilitate identification of risk trends.Appendix A: Risk management checklist Risk architecture  Statement produced that sets out risk responsibilities and lists the risk-based matters reserved for the Board  Risk management responsibilities allocated to an appropriate management committee  Arrangements are in place to ensure the availability of appropriate competent advice on risks and controls  Risk aware culture exists within the organisation and actions are in hand to enhance the level of risk maturity  Sources of risk assurance for the Board have been identified and validated Risk strategy  Risk management policy produced that describes risk appetite.

and monitor improvement  Legal requirements 18 A structured approach to Enterprise Risk Management . Plan the scope of the ERM initiative and develop common  Upside of risk language of risk  Stakeholder expectations 3. Establish the risk management strategy. Ensure cost-effectiveness of existing controls and introduce  Risk improvement plans improvements  BCP and DRP 8. The 10 steps are divided between: Activity Concepts / Tools and techniques Planning and designing (see Section 5) 1. framework.Appendix B: Implementation summar y The table below provides an overview of the steps  Planning and designing involved in the implementation of an enterprise risk  Implementing and benchmarking management (ERM) initiative. Identify intended benefits of the enterprise risk management  Benefits of ERM initiative and gain Board mandate  Embedding risk management 2. Adopt suitable risk assessment procedures and an agreed  Risk description risk classification system  Risk classification systems 5. Determine risk appetite and risk tolerance levels. Report risk performance in line with legal and other  Risk reporting obligations. and  Risk management policy the roles and responsibilities  Risk architecture Implementing and benchmarking (see Section 6) 4. and  Risk register evaluate the existing controls  Risk appetite Measuring and monitoring (see Section 7) 7. Embed risk aware culture and align risk management with  Control environment other management tasks  Risk communications Learning and reporting (see Section 8) 9. Successful implementation of an ERM initiative is an ongoing  Measuring and monitoring process that involves working through the 10 steps  Learning and reporting set out below on a continuous basis. Monitor and review risk performance indicators to measure  Audit plan and risk reviews ERM contribution  Sources of risk assurance 10. Establish risk significance benchmarks and undertake  Risk assessment techniques risk assessments  Benchmark tests of significance 6.

org www. Insurance and Risk Managers London EC3N 3AX Telephone 020 7480 7610 Facsimile 020 7702 3752 Email Alarm Ashton House The Public Risk Management Association Weston Telephone 0333 1230007 Sidmouth Devon EX10 0PF Facsimile 0333 4560007 Email This document is available for download free of charge from the websites of the above organisations. The Association of 6 Lloyd’s www. Telephone 020 7709 9808 London EC3N 3AX Facsimile 020 7709 0716 Email .org The Institute of Risk Management 6 Lloyd’s Avenue.