Part I
Companies across the world are searching for new ways to get ahead of competition through complex strategies such as industrial and international diversification, open innovation, sophisticated capital structuring, etc. However, under the guidance of such strategies, organizational risks mushroom. This has prompted companies to adopt enterprise risk management (ERM), which is a relatively new and enterprise-wide approach to risk management. As many companies engage in ERM, various frameworks have been introduced to guide its implementation: the Casualty Actuarial Society’s (CAS’s) framework, Coso’s Enterprise Risk Management Integrated Framework, the ISO 31000 risk management framework, etc. But the bulk of them have been about technical and compliance requirements. For those interested in understanding the organizational factors to be taken into account for successfully implementing ERM, the existing frameworks fall short.
Overall, as a risk manager, you need to know that ERM implementation is a sociotechnical challenge. In other words, an array of sociotechnical factors combines to influence the successful implementation of ERM.
What are those social and technical factors you may be asking yourself? In this first part of the article, 1 only the social factors are presented.
A- SOCIAL FACTORS
Strategic guidance Framework
Management needs to combine the project vision with the business rationale into a strategic guiding framework.
The vision serves to clarify the objectives and overall direction of the project and should be consistent with the project definition, scope, objectives, and strategy.
The business rationale, commonly formulated by senior management serves to promote the ERM project, including how it should be justified, funded, and legitimized. To this end, it should provide a range of criteria whereby the implementation project may be justified, highlighting the expected benefits including the involved changes. Despite its strategic character, the rationale must be disseminated at the operational project level so that it is understood by those responsible for implementing the ERM project .
Such a strategic orientation facilitates stakeholders’ involvement in the ERM implementation project and consequently the implementation success.
Top Management Support
ERM cut across functional areas. Top management support is especially critical for breaking the silo culture and building partnerships among functional unit executives. Senior managers are the first organizational members to see new opportunities created by the needs in one functional area that could be served by skills in another functional area. In addition, senior managers’ beliefs about and participation in ERM initiatives help foster engagement among the targeted organizational actors in the ERM project. Similarly, because top managers’ beliefs strongly influence employees’ beliefs and attitudes, operational-level managers was prone to place the ERM project at the top of their priority list.
Coordination mechanism
The ERM being an enterprise-wide approach, cuts across functional areas which are communities of practice, some sort of knowledge pockets. Therefore, in the context of ERM implementation, coordination is highly mandatory to integrate the specific knowledge developed and accumulated by different functional units of the company. In particular, the presence of a liaison team in charge of coordinating the activities of the ERM implementation project has proved effective.
Employee involvement
ERM implementation entails considerable behavioral changes training, and learning. For instance, those involved in risk management have to expand the range of skills they are supposed to be proficient in. In addition, they have to collaborate with employees from other units. This collaboration involves mutual adaptations in terms of attitudes and behaviors. Only those employees, who feel involved in, cognitively preoccupied with, engaged in, and concerned with the ERM project consented to take up these challenges.
Organizational climate
An ERM implementation project deeply affects the functioning of the company in many ways: collaboration among all functional areas, transparency regarding risks, the creation a common risk language, the adoption of new procedures. In this regard, as one could expect, an organizational climate of integration promoting professional interdisciplinary and cohesion among knowledge area executives and teams was found to be conducive to ERM successful implementation.
Footnotes
- The research project extended over a four year period. Discussions with seasoned risk management professionals allowed deepening our understanding of the issues. Subsequent discussions with academicians help build the theoretical framework. All this culminated in a robust research model which has been tested through a survey using structural equation modelling.