67. Is Enterprise Risk Management (ERM) overrated? | A critical look at ERM methodologies

Summary

In this video, Alex from Risk Academy explores the concept of Enterprise Risk Management (ERM), questioning its usefulness and effectiveness. With years of experience in risk management, he critiques ERM as a flawed, overly simplified framework that lacks consistency. Alex suggests that instead of a single, companywide approach, organizations should use multiple risk management methodologies tailored to specific processes like budgeting, investment, and procurement. He emphasizes that risk management should be integrated with decision-making activities, not treated as a standalone objective. Alex invites viewers to share their perspectives on ERM and encourages them to subscribe for more thought-provoking content.

Takeaways

• 😀 ERM (Enterprise Risk Management) lacks a single global definition, and its implementation varies across organizations.
• 😀 Alex has over 13 years of experience in risk management but still struggles to define what ERM truly is.
• 😀 ERM was initially introduced as a hypothetical concept by consultants, which led to inconsistent implementations worldwide.
• 😀 Alex criticizes the common practice of creating a single, consolidated risk management framework for all types of risks within a company.
• 😀 Instead of a single framework, Alex believes that different methodologies should be used for different types of risks and decision-making activities.
• 😀 Alex suggests that risk management tools, techniques, and assessments should be tailored to specific activities, such as budgeting, investment management, and procurement.
• 😀 He emphasizes that risk management should be applied when making important decisions, not as a routine, scheduled task.
• 😀 Alex rejects the idea of consolidating all risks into one unified risk profile, as it disconnects risk information from important management activities.
• 😀 ERM, according to Alex, should not be treated as a separate agenda item at board meetings but integrated into strategic planning and business decision-making processes.
• 😀 Alex believes that risk management is only effective when it is part of a larger decision-making process, rather than being an isolated objective.
• 😀 He invites viewers to share their perspectives on ERM and encourages them to subscribe to the Risk Academy Channel for more thought-provoking content.

Q & A

What is the speaker's opinion about the usefulness of Enterprise Risk Management (ERM)?

The speaker expresses uncertainty about the usefulness of ERM, stating that after over 13 years in the field, they still don't fully understand it. They highlight the lack of a single, global definition of ERM and suggest it has been implemented in inconsistent ways across organizations.

How does the speaker define ERM based on their experience?

According to the speaker, ERM involves a risk manager creating a company-wide framework or methodology to assess and manage risks across different business units. The goal is to develop a consolidated risk profile of the organization, which the speaker criticizes as inadequate and disconnected from real business activities.

Why does the speaker consider a company-wide risk management framework unnecessary?

The speaker believes that a single company-wide framework is impractical, as different business activities require different risk management methodologies. They suggest that various processes within an organization, like budgeting or procurement, should each have tailored risk management tools and techniques.

What does the speaker suggest should happen instead of a unified risk management framework?

The speaker suggests that instead of a unified framework, there should be different methodologies for different business processes. For example, there could be separate methodologies for risk-based budgeting, investment management, and procurement, each with its own tools and techniques.

How does the speaker believe risk management should be integrated into business processes?

The speaker advocates for risk management to be part of critical business decisions, such as budgeting, investment planning, and procurement. Risk analysis should be performed as these decisions are being made, rather than being treated as a separate or standalone activity.

What is the speaker’s view on risk consolidation into a single risk profile?

The speaker believes that consolidating all risks into a single risk profile is ineffective. They argue that strategic planning or budgeting processes may involve consolidating risks in certain cases, but there is no need for a general, company-wide risk profile that is detached from key business activities.

Why does the speaker view risk management as ineffective when it becomes a standalone activity?

The speaker argues that when risk management becomes a separate agenda item or a standalone activity—unrelated to strategic goals or investment decisions—it loses its relevance and effectiveness. It will likely be treated as a formality rather than being genuinely integrated into the organization's decision-making process.

What does the speaker believe is the proper role of risk management in an organization?

The speaker believes that the proper role of risk management is to be a step in the process that leads to important business decisions. Risk management should not be the objective itself, but a tool that helps inform key activities like strategic planning, budgeting, and investment management.

How does the speaker suggest risk management methodologies should be aligned across an organization?

While the speaker suggests multiple risk management methodologies for different activities, they emphasize that these methodologies should still be aligned in terms of principles. For instance, they should all adhere to the basic principles of risk identification, assessment, analysis, and mitigation, but with tools and approaches tailored to the specific decision-making processes.

What example does the speaker provide of an organization using different methodologies for different activities?

The speaker provides the example of a sovereign fund in Russia, where they worked. This organization used five different methodologies, each tailored to specific business activities like budgeting, investment management, and procurement. Each methodology had different checklists, tools, and criteria.