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10 Steps to Effective Enterprise Risk Management

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Enterprise risk management (ERM) has emerged as a best practice in gaining an overview of strategic, financial and operational threats, and in determining how to mitigate and manage those risks.

A comprehensive approach to risk management is important because it helps management comprehend the true potential of threats and allows organizations to address the cumulative nature of risk.

The following steps can help your company achieve the ERM objective.

  1. Just Do It!
    The process of creating an ERM program is valuable, revealing much about your organization and the interrelatedness of elements within it.

    Document your efforts in your board minutes and share them with any auditors. You will generally find those parties willing to provide constructive feedback because they have a vested interest in the success of your efforts.

  1. Get a Champion
    Your board of directors is accountable to shareholders and the SEC (if your company is public)—and possibly to other entities by industry—for the adequacy of risk management procedures, controls and ultimately for the competence of management. A logical champion of your ERM efforts is the chairperson of your board audit or ERM committee, followed by the chair of the board and other board members. If these individuals understand that an ERM program can help them discharge their duties and protect them from personal financial risk, you will likely see top-level buy-in and a trickle-down effect through senior management.
  1. Merge the Silos
    If existing risk committees and sub-committees are functioning as intended and get consistently high marks from outside auditors, it’s unlikely that fundamental changes are needed. Yet it is important they understand where they fit in the bigger picture. A board-level champion can help provide this perspective, and reinforce the role of the ERM committee in setting the organization-wide level of acceptable risk.
  1. Weight the Risks
    Certain areas of risk have the potential to seriously harm your organization. Others, however, are less critical. When your management team assembles an ERM framework, create a logical mechanism for assigning relative weights to each area of risk, and to selected components within those areas.
  1. Create a Dashboard
    A dashboard containing a high-level summary of major risk elements supported by “drill-down” detail enables board members and senior managers to connect all the pieces of the risk management puzzle.A dashboard need not be complex. Some managers use Microsoft Excel to create multi-layered risk workbooks, which summarize details provided by the risk sub-committees into a single page of high-level information.

  1. Understand Risk and Reward
    Some risks are worth taking, because the reward is greater than the likelihood and consequences of failure. In other cases the reward does not outweigh the potential consequences. Then there are risks not worth considering, when the risk is a “bet-the-farm” proposition, or is illegal or immoral. Each risk committee and sub-committee should understand the risk-versus-reward proposition.
  1. Set Limits
    One important function of the board ERM committee is to work with management to establish limits to risk taking. Management should make recommendations to the board, supported by reasonable data and arguments, which establish the boundaries of the organization’s risk appetite. Management’s role is to advise and inform, with the ultimate decision resting with the board.
  1. Understand the Cumulative Nature of Risk
    An organization that could sustain itself through one or two major weaknesses, or several minor ones, will succumb under too many. For this reason, the board ERM committee should set limits for both individual risks and cumulatively.
  1. Make It Easy
    In the areas of setting limits and risk weighting, management should make it as easy as possible for board members to comprehend and participate in the process. Distill complex regulations, and use accepted business terminology.

    Implementing an ERM framework should be spread over several months, if possible. Give the board ERM committee two or three recommendations per month, in advance, so they can be reviewed, summarized, presented and adopted at the regular monthly meeting.

  1. Refine, Refine, Refine
    New risks emerge every day, and your process must be flexible enough to identify, quantify and incorporate them. The chief risk officer and other senior managers should devote time to researching emerging risks, imagining worst case scenarios and creating stress tests to understand the implications of critical failures.

A Top-To-Bottom Effort
It is possible for ERM practices to become part of your organizational culture. Global awareness of the process and a rank-and-file understanding of the board’s focus on effective risk management are critical to obtaining the buy-in of the entire organization. After all, risk management is everybody’s job—today more than ever.

Protecting Your Company from Rogue Employees

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While employee malfeasance rarely takes down entire companies, it can result in serious fines, sanctions, court judgments, settlements and reputational damage. Big data analytics is one way leading companies are able to mitigate risk, by proactively detecting threatening or illegal behavior.

Traditional ERM Approaches Won’t Do

Compliance officers do their best. They generally work within enterprise risk management (ERM) frameworks to introduce corporate policies and procedures, conduct risk avoidance training and audits, and create inter-disciplinary committees. They work with IT to run compliance auditing software on critical structured data, including financial databases and transactional applications.

By targeting only well-behaved structured data, however, compliance officers can lose sight of one key fact—structured data is a small percentage of organizational data. Data storage analysts report that most organizational data are only 15% to 20% structured data and 80% to 85% unstructured.

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This leaves a huge volume of data that presents serious compliance risk to IP, especially electronic communications.

While e-mail, instant messaging, texting and social media are ingrained in our culture, traditional auditing software does not focus on communications. These threats often evade notice until the damage is done.

Here are some ways threats can escape the radar of employers that have traditional ERM approaches:

  • Limited ability to analyze unstructured data. The inability to monitor unstructured data leaves the company open to regulatory consequences and other risk.
  • Keyword searching to winnow down data sets often delivers a high volume of false positive results. Filtering techniques such as keyword searches may not be highly accurate and require intensive manual review.
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    The result is higher cost and longer timeframes for manual-review projects.

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  • Potential security issues. Communication platforms are rapidly proliferating. Employees might be sharing inappropriate corporate information on social media, yet these mentions often go unmonitored by the company, potentially missing evidence of employee misconduct.
  • Complex regulatory changes. Many governmental and industry regulations are already complicated, and their revisions only intensify complexity. For example, since introducing Dodd-Frank, regulators have written 224 of 400 expected rules and continue to modify existing rules.
  • Case-by-case approaches. Case-centric approaches to litigation, investigations and regulatory compliance matters impede applying learning and attorney work product on these cases to other matters. This inability lengthens legal reviews and investigations and multiplies costs. Case-based discovery also makes it difficult to discover widespread risky communications between employee groups and outside organizations.
  • Geographic and organizational silos. Relevant data is spread across different storage locations and eDiscovery platforms, creating distinct data silos.

A Cautionary Tale

Here is an example of risk that can go undetected until it’s too late, as it did at Wells Fargo. Banker 1 is responsible for reaching high quarterly sales goals. His manager increases his sales goals for the next quarter. Banker 1 emails a colleague complaining about how his goals are impossible to meet. Banker 2 suggests he try a creative process called “pinning,” which consists of a banker enrolling an actual customer in online banking to create a “sale.” The banker fills in the customer’s name and address but puts in a fake email address so the customer never receives banking communications. The banker meets his sales goals—and hopes the customer never finds out.

How Big Data Analytics Can Help

Analytics tools are already omnipresent in eDiscovery and compliance reviews. They include predictive coding, email threading and concept searching. They are highly useful for culling large data volumes to more manageable sizes. They also locate meaningful text and concept patterns so that reviewers can strategically work with high priority documents.

The catch is that these analytics can only filter to a point, and only work on a single-case basis. No matter how the case management software learns from tagging and work product, that learning cannot be applied across multiple matters if it resides on different review platforms or with different vendors. Each time a new case begins, reviewers and their software must start over. This leads to very long and repetitive document review processes, already the single most expensive activity in eDiscovery. Clients and attorneys also risk exposing sensitive information as the matter makes its way between document review platforms and multiple stakeholders.

A big data approach, versus specific analytics tools can continuously consolidate billions of documents into a central repository. It can also apply machine and human learning to enable the reporting of trends, new data relationships, and fresh insights into data across all cases—not just a single matter—for greater efficiency, cost control and risk mitigation.