Enterprise risk management, or ERM, is a term that’s frequently heard these days in many industries. As the business world becomes more sophisticated in technology, processes, and scope, businesses are starting to realize the many risks they’re exposed to on a daily basis. It’s no longer good enough to have merely a good insurance policy in place. Businesses need to take more comprehensive actions to protect themselves from threats, both seen and unseen.
Credit Unions Are Vulnerable, Too
The credit union industry is no different from any other in this regard. Credit unions are vulnerable to a variety of risks – competitive, financial, operational, and strategic risks; risks from personnel; risks to reputation; and economic, environmental and force-of-nature risks over which they have no control. Many credit unions are in the habit of reacting as each situation occurs. However, advance planning for the inevitable and the unforeseen is what enterprise risk management is all about. It’s only a matter of time before your credit union falls prey to a business-damaging event. The question is this: Will you be ready when it strikes?
ERM is the Solution
Unfortunately, the answer for most credit unions is a resounding “No.” While many credit unions have begun to dabble around the edges of ERM, very few have implemented robust enterprise risk management systems that provide the coverage and structure needed to protect the organization in the way it needs to be protected. Part of the reason for this is that it’s complicated. ERM programs are multi-faceted, and many board members and high-level executives don’t fully understand how they work. They also don’t grasp the implicit need for an ERM system or the strategic value to be derived; they may feel that the status quo is working fine.
Another reason for the lack of credit union participation in ERM stems from the perception that the implementation of a robust ERM system is both time-consuming and expensive. In reality, it’s neither. When factoring in the strategic benefits of implementing and employing an enterprise risk management system and incorporating its intelligence throughout the organization, you find that it easily pays for itself in future revenues garnered from otherwise-missed business opportunities.
When considering an ERM program, it’s important to keep in mind that these programs are designed not only to help mitigate the negative. They’re also designed to look for the positive. Focusing on the competitive landscape with a forward-looking mentality allows the organization to identify and take advantage of opportunities it might otherwise have missed without the benefit of the data gathered through an ERM system.
ERM Defined
A good definition of enterprise risk management is found in Investopedia: “Enterprise risk management (ERM) is a plan-based business strategy that aims to identify, assess and prepare for any dangers, hazards and other potentials for disaster – both physical and figurative – that may interfere with an organization’s operations and objectives.” It’s important to note that not only does ERM identify potential risk factors; it also creates a plan to mitigate those risks, and provides greater assurance of meeting strategic objectives in the face of uncertainty.
In addition – and this is a step that’s often ignored by credit unions – the resulting risk assessments and mitigation plans must be filtered throughout the organization to all departments and at all levels. Without this critical step, the intelligence gained through the ERM process is less effective than it could be. It must be disseminated to anyone in a position to make decisions on behalf of the institution. Implementing this step effectively gives managers a roadmap and structure in which to function, and facilitates decision making that is financially beneficial to the organization and within acceptable risk tolerance guidelines. Managers can now make decisions that not only avoid known threats but also take advantage of identified opportunities within the competitive marketplace.
Credit unions are most often plagued by risk factors that can be categorized as strategic, operational, or financial. This does not mean that external events such as recessions, wildfires and earthquakes don’t also come into play; but these events are less under the control of the organization, whereas strategic, operational, and financial risks are more easily identified and controlled from within. A good ERM program uses risk assessment tools to look at each of these areas to identify potential vulnerabilities, analyze the severity of these vulnerabilities, and create a plan for mitigation of identified threats in all areas across the enterprise. Risk scores are assigned based on the severity of the potential threat, its likelihood of occurrence, and the degree to which it’s mitigated. This gives management and board members a way to measure the organization’s tolerance for risk and helps them create a realistic business strategy that takes into account acceptable levels of risk in each category and throughout each department, resulting in better strategic decision-making for the credit union as a whole.
Protect Your Credit Union Today
Enterprise risk management should be an integral part of any credit union’s management strategy. Rochdale Paragon Group is an industry leader in enterprise risk management. They have years of experience in helping credit unions successfully implement ERM solutions that take their organizations to new heights. For additional information or help in implementing an ERM program into your credit union, contact Rochdale Paragon Group today.