Integrating it with strategic planning shifts perceptions that ERM is a bureaucratic exercise.
Enterprise risk management (ERM) is often viewed by business leaders as a check-the-box exercise that interferes with the profit engines they’re seeking to run.
A treasurer at a recent NeuGroup meeting who also chairs his company’s risk committee sought advice on how to convince the leaders of business units and other corporate entities that the ERM process adds value. Ed Scott, senior executive advisor at NeuGroup and a retired Caterpillar Inc. treasurer, noted two approaches Caterpillar used to improve ERM.
Strategic planning integration. ERM must be integrated with the company’s strategic planning efforts.
- A lesson learned, Mr. Scott said, is to coordinate ERM with the planning that each business does annually. At Caterpillar, that’s done in the fall, but the ERM exercise was conducted from December through February, confusing business-unit managers and making integration with the strategic plan more difficult.
- “Prior to integrating the ERM process with annual strategic planning, action plans for each risk weren’t part of the goals and objectives for each business unit’s strategic plan, so it looked like just a bureaucratic, regulatory exercise,” Mr. Scott said.
- To improve the process, ERM was moved from internal audit (IA) to the strategic planning group. “So now it was no longer some bureaucratic exercise but viewed as part of the strategic planning process,” he said.
The third dimension. ERM risk profiles typically factor in the probability of a risk occurring and the resulting severity in terms of cost. Several years ago, Caterpillar added time for the risk to occur as a third factor. For example:
- In the case of a chemical company, there is a low to medium probability of a railcar chlorine spill, but if it occurred it would be severe and immediate. The severity and urgency would make it high risk.
- Conversely, losing highly talented employees may be a medium risk and potentially severe, but since it could occur over a longer period of time, the total risk may be diminished.