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Enterprise Risk Management: Managing Uncertainty and Minimizing Surprise
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Many of the most important decisions made within an organisation relate
to risk, because anything that is innovative or competitive or worth doing is
likely to be risky. However, risk exists at various levels within an organisation,
from top to bottom. As a result the effective organisation needs to be able to
communicate about risk between levels in a way that enables it to manage
uncertainty and minimise surprises. Unfortunately it is all too common for
organisations to suffer the effects of unmanaged uncertainty and to be reacting
to surprises rather than responding proactively. This is usually because risks
remain hidden within the organisation at levels where they cannot be managed
appropriately or effectively. In order to counter this tendency risk information
must be advised upwards to ensure that it reaches the right level where it can
be used to influence the overall performance of the organisation.
This chapter explains how risk relates to the most fundamental purposes
of any organisation through its inherent link to objectives, and presents the
case for an integrated and hierarchical approach to risk management across the
organisation, known as Enterprise Risk Management (ERM). After defining the
main concepts and outlining the basics of the risk process, we consider the two
key aspects of ERM that are often least well addressed, namely how to manage
risk across boundaries within an organisation, and how to report risk upwards
to the appropriate level for both attention and action.