european journal of social sciences issn: 1450-2267 - EuroJournals

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European Journal of Social Sciences – Volume 5, Number 3 (2007) No entity operates in a risk-free environment, and ERM does not create such an environment. Rather, ERM enables management to operate more effectively in environments filled with risks. All organizations can benefit from improved ERM procedures in meeting objectives related to strategic direction, operations, reporting and compliance. ERM provides management with enhanced capabilities to align risk appetite and strategy, link growth, risk and return, minimize operational surprises and losses, identify and manage cross-enterprise risks and rationalize capital (PricewaterhouseCoopers, 2006). Recently, there is an increasing attention for ERM implementations in various industries. Many problems are appearing in air transportation sector since regarding issues of ERM implementations are very limited in both quantity and context. This study is prepared to answer this need. As the dynamics of the market, business environment and changes in regulatory requirements for corporations increase in their complexity, it becomes harder to plot the right course for continued success. Being able to identify and adapt to changes are key success factors for the leaders of tomorrow. In light of these events companies are driven more than ever by the desire to protect their reputation and manage their risks effectively. ERM provides a framework for management to effectively deal with uncertainty and associated risk and opportunity thereby enhancing management’s capacity to build value. ERM does not operate in isolation in a corporation, but rather is an enabler of the management process. ERM is a part of corporate governance by providing information to the Board and to the Audit Committee on the most significant risks and how they are being managed. It interrelates with performance management by providing risk-adjusted measures. ERM is an integral part of internal control. Given the importance of ERM, the key objectives of this survey were to identify (PriceWaterhouseCoopers, 2006): 1. Current focus areas in corporate risk management 2. Current and planned risk management related functions in the companies 3. Current and planned risk management processes at the enterprise level 4. Practical next steps to advance ERM within organizations The organizations reported many benefits of managing risk. The benefits, overall, relate to organizational objectives and the management process. The key benefit is the achievement of organizational objectives. Other reported benefits are better focus on business priorities, strengthening of the planning process and the means to help management identify opportunities. The reported benefits to the management process include: a cultural change that supports open discussion about risks and potentially damaging information; improved financial and operational management by ensuring that risks are adequately considered in the decision-making process; and increased accountability of management (KPMG, 1999). No risk management process can create a risk-free environment. Rather ERM enables management to operate more effectively in a business environment filled with fluctuating risks. Enterprise risk management provides enhanced capability to (COSO, 2006): _ Align risk appetite and strategy: Risk appetite is the degree of risk, on a broad-based level, that a business is willing to accept in pursuit of its objectives. Management considers the business’s risk appetite first in evaluating strategic alternatives, then in setting boundaries for downside risk. _ Minimise operational surprises and losses: Businesses have enhanced capability to identify potential risk events, assess risks and establish responses, thereby reducing the occurrence of unpleasant surprises and associated costs or losses. _ Enhance risk response decisions: ERM provides the rigour to identify and select among alternative risk responses – risk removal, reduction, transfer or acceptance. _ Resources: A clear understanding of the risks facing a business can enhance the effective direction and use of management time and the business’s resources to manage risk. _ Identify and manage cross-enterprise risks: Every business faces a myriad of risks affecting different parts of the organisation. The benefits of enterprise risk management are only optimised when an enterprise-wide approach is adopted, integrating the disparate approaches to risk management 64
European Journal of Social Sciences – Volume 5, Number 3 (2007) within a company. Integration has to be effected in three ways: centralised risk reporting, the integration of risk transfer strategies and the integration of risk management into the business processes of a business. Rather than being purely a defensive mechanism, it can be used as a tool to maximise opportunities. _ Link growth, risk and return: Business’s accept risk as part of wealth creation and preservation and they expect return commensurate with risk. ERM provides an enhanced ability to identify and assess risks and establish acceptable levels of risk relative to potential growth and achievement of objectives. _ Rationalise capital: More robust information on risk exposure allows management to more effectively assess overall capital needs and improve capital allocation. _ Seize opportunities: The very process of identifying risks can stimulate thinking and generate opportunities as well as threats. Reponses need to be developed to seize these opportunities in the same way that responses are required to address identified threats to a business. There are three major benefits of ERM: improved business performance, increased organizational effectiveness and better risk reporting. 3.1. Best Practice Concept to ERM and its Framework In order to provide comparability and usefulness to the collection of information regarding "best practices" in risk management, it was necessary to first define "best practice" in the context of this study. This definition was developed jointly with KPMG to be used as well in its international study. “Not all risk management practices are best practices, nor would all good practices have relevance or be readily adaptable to the federal public service. It was concluded that a best practice would be a strategy, approach, method, tool or technique that was particularly effective in helping an organization achieve its objectives for managing risk. A best practice would also be one that was expected to be of value to other organizations. For example, a practice that was particularly helpful in establishing guidance would be of value to many other organizations, including the Treasury Board of Canada Secretariat (TBS) as the provision of”. A best practice is a strategy, approach, method, tool or technique, which was particularly effective in helping an organization achieve its objectives for managing risk. A best practice is also one that is expected to be of value to other organizations. Figure-1 provides an overview of the eleven best practices that identified in the study. The “hub,” from which all other practices derive, is the organizational philosophy. All practices provide the movement to integrate risk management within the organization. Approaches, tools and techniques are the interface with the “road”, or the direction and objectives of the organization. Many of the practices are inter-related. For example, “teaming” requires “open communication” (KPMG, 1999). Figure 1: Overview of best ERM practices (KPMG, Best Practices in Risk Management: Private and Public Sectors Internationally, April 1999, p. 5.). Guidance Internal Audit assistance Training Communicating performance Corporate function Teaming Philosophy that everybody is a risk manager Objectives 65 Senior Management & Board leadership Open communication & information flows Simple language
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european journal of social sciences issn: 1450-2267 - EuroJournals

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