In an increasingly complex risk environment, a number of global organizations have insufficient approaches to risk management and immature enterprise risk management (ERM) processes.
The 2022 Global State of Risk Oversight: Managing the Rapidly Evolving Risk Landscape report, commissioned by the AICPA & CIMA and North Carolina State University’s Enterprise Risk Management Initiative, surveyed 747 global senior finance and business leaders in 2022. The survey measured executives’ assessments of the level of maturity in their organization’s proactive management of risks through the adoption of ERM processes, which can help to look at risk management strategically from the entire firm’s perspective.
The report revealed five overarching ERM themes that emerged from the survey data:
1. Business leaders sense that their risks are quickly increasing; however, most do not think their risk management process is mature or robust.
Increased uncertainty and evolving events, including geopolitical shifts, supply chain disruptions, talent competition, increased available data, climate change concerns, and the global pandemic, are continuing to propel the intricacy of risk challenges. Yet, for most regions of the world, only 25% of organizations have complete ERM processes.
2. Most organizations struggle to integrate risk management and strategic decision-making activities, leading to a perception that risk management does not provide a competitive advantage.
Many organizations’ risk oversight and strategic planning efforts seem separate and distinct. For example, less than 50% of respondents believe their risk management approach provides strategic advantages. That percentage is noticeably lower for organizations in Europe, the U.K., and the U.S. Approximately 50% of organizations believe their risk management processes concentrate on emerging strategic, market or industry risks.
3. An organization’s culture may limit progress toward risk management improvements.
Several potential obstacles within organizations limit progress toward improving risk management processes. Most organizations do not incorporate explicit risk management responsibilities in performance compensation plans, and less than 33% of organizations have supplied formal training and guidance on risk management.
4. The need for more advanced risk oversight is becoming clear.
Less than 50% of most organizations have regular and robust reporting of top risks to the board on an ongoing basis. Organizations acknowledge the need to strengthen their business continuity planning processes, particularly those in Asia, Australia, Africa and the Middle East. Calls for enhanced risk oversight are strong between boards and chief executive officers (CEOs)/presidents.
5. Risk management practices may not keep pace with the speed of risk.
Approximately 50% of organizations outside Europe and the U.K. have appointed a senior management executive to lead the risk management process; and more than 33% of organizations in Europe and the U.K. have done so. In addition, less than 50% of organizations maintain risk inventories at an enterprise-wide level.
These five themes highlight several realities of current risk management processes in organizations worldwide. Business and security leaders can ask themselves the following questions to evaluate an organization’s preparedness for addressing the risk landscape, including:
- Is the organization’s approach to risk management delivering robust risk insights helpful for strategic decision-making?
- To what extent has the leadership team been blindsided by unanticipated risks that management failed to see in advance?
- Would most of the leadership team describe the approach to risk management as ad hoc and informal? How would the descrip¬tion vary if individual members of the board or senior management are asked to respond?
- Who among the management team can be viewed as a risk champion — who can help advise and coach the leadership team to oversee future risks? Does a lack of risk leadership impede risk management effectiveness?
- To what extent does management’s identification of critical risks tend to focus on already known or well-understood risks? To what extent is the risk management process helping management identify unknown risks?
- Does senior management agree about the top risks most important to the organization?
- How does the senior management team incorporate risk perspectives into all strategic planning, budgeting, or capital allocation processes? When evaluating strategic alternatives, does the strategic planning process assess the nature and extent of risks identified by the risk management process? Are top risks a critical input to the strategic planning process?
- How confident is senior management that the organization’s current responses to its top risks are in place and effective? Does senior management understand the root causes of the top risks, and are responses designed to help prevent root causes from emerg¬ing? For risks that can’t be deterred, are there responses to mitigate the impact should the risk occur?
- To what extent does management’s information dashboard include risk metrics that monitor the potential escalation of risks over time?
- To what extent do the organization’s leaders promote an honest and transparent escalation of risk issues from middle man¬agement to senior management and the board of directors? How can training on risk management help key business leaders understand the significance of raising awareness of risk issues?
Business and security leaders who embrace the reality that risk and return are interrelated are likely to increase their investment in enterprise risk oversight to strengthen the organization’s resiliency and agility, the report says. Organizations can enhance enterprise risk oversight on many fronts, building robust processes, competencies and capabilities, and effectively using data to inform those efforts. In doing so, risk management can be transformed into a competitive advantage.
For more findings, visit www.aicpa.org.
