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Director’s guide to ERM fundamentals
ERM programs are intended to formalize how risks are identified, assessed, managed, monitored and reported on in light of strategic priorities. But what we’re seeing is that some ERM programs aren’t getting the desired traction, either losing momentum or lacking adequate investment. In short, they’re not doing what they’re supposed to do.
Having an effective ERM program can help the board and management make more informed decisions in the face of uncertainty — whether that’s specific to a particular company or sector or facing the entire economic landscape.
How to use this guide
The first part of this guide introduces what it means to build a sustainable and enabling ERM program, including how the board can assess whether their ERM program’s maturity is where it should be. The second part of this guide outlines six key elements that we think make up an effective Enterprise Risk Management program. These key elements offer directors a foundation for overseeing enterprise risk management.
Enterprise
- Alignment with corporate strategy: helping boards oversee risk as part of strategic planning and execution, not separate risk from strategy
- Risk strategy and governance: driving clarity for managing and overseeing risk
Risk
- A common risk language: promoting a consistent view of risk
- Enterprise risk assessment: helping senior leadership and the board prioritize risk
Management
- Risk response plans: managing prioritized risks
- Ongoing monitoring: recognizing changes in risk
PwC’s ERM Maturity Model at a high level
How can we assess whether our ERM program’s maturity is where it should be?
Boards should question the maturity of the company’s ERM program and help management set expectations for where the organization wants to be in the future.
Foundational elements of enterprise risk management — breaking E-R-M down
- Alignment with corporate strategy
- Risk strategy and governance
- A common risk language
- Enterprise risk assessment
- Risk response plans
- Ongoing monitoring
Alignment with corporate strategy
Helping boards oversee risk as part of strategic planning and execution, not separate risk from strategy
Unexpected risk events have shown boards and management the value of instituting ERM practices. The degree of complexity and change facing organizations today highlights the need for strategies that account for risk.
Read more in the report
Risk strategy and governance
Driving clarity for managing and overseeing risk
Having a written charter or plan takes a concrete step towards a commitment to action; it is critical to ERM program development and survival. A charter or plan is a good first step...BUT if you want to really advance your program, you need a risk strategy and governance framework.
Read more in the report
A common risk language
Promoting a consistent view of risk
For successful implementation of an ERM program, leaders should also institute a common risk language across all levels of the organization. This creates a single version of the truth and a consistent view of risk. Boards should look for standardization in the company’s risk management terms and processes.
Read more in the report
Enterprise risk assessment
Helping senior leadership and the board prioritize risk
Many companies see a simple enterprise risk assessment as the end product of the risk management process; however, it’s only one aspect of ERM. One of the most important elements in the risk assessment process is the prioritization of risks and the analysis of capabilities in order to drive the development of risk-based strategies and response plans.
Read more in the report
Risk response plans
Managing prioritized risks
The output of a risk assessment process is often a risk response plan — a plan that details the company’s actions in mitigating risk issues. Plans should clearly articulate the risks, underlying causes, potential consequences and interrelated risks, along with how they relate to strategic objectives and current initiatives.
Read more in the report
Ongoing monitoring
Recognizing changes in risk
Establish a risk appetite and key risk indicators. One of the most common and effective forms of ongoing monitoring is done through the development of a risk appetite framework and a set of key risk indicators. Risk appetite defines the level of risk an organization is willing to accept in pursuit of its strategic objectives; it sets the boundaries within which risks should be managed.
Read more in the report
Conclusion: supporting management in the company’s ERM journey
The design and implementation of foundational ERM components can take time and depends on both the complexity the company faces in its operations and external environment and the resources committed to risk management. Leaders can’t take a one-size-fits-all approach to ERM - the process must align with the company’s culture, size, and complexity. To adequately oversee risk management, boards need to understand the foundational ERM elements and where they can make a difference in supporting management in the company’s journey. As the ERM program matures, the board can promote continuous improvement by challenging management on what is working and what is not.
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Leader, Governance Insights Center, PwC US
Partner, Cyber, Risk and Regulatory, Washington, PwC US
Director, Governance Insights Center, Washington DC, PwC US
Director, Governance Insights Center, New York, PwC US
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