The balance-sheet perspective of enterprise risk management.

• Author: Wiklund, Dana
• Position: RISK MANAGEMENT

Enterprise risk management can mean different things to different executives. Senior financial executives should view ERM as managing the interrelationship of a company's business objectives, the resources needed to realize those objectives and the risks that hinder or preclude a firm from achieving them.

In other words, ERM generally provides a view of the harm that can happen to a firm. And when viewed through the prism of the balance sheet, ERM provides a more actionable perspective of the assets and liabilities that will be impacted by any variety of loss possibilities.

That's because any potential loss event will impact firm resources and one or more business objectives. The financial impact will cascade through financial statements--whether balance sheet, income statements, statement of cash flows or shareholder equity statement--to the detriment of the firm.

Financial executives must think through potential future risks that could emerge from changing societal, market and environmental conditions as well as shifts in political and regulatory philosophies.

Additionally, they should keep in mind the importance of factoring in the orientation of business objectives. This enforces a perspective of interconnectivity or interdependence of resources that should permeate any approach to building and maintaining an ERM program.

Business objectives can run vertically or horizontally through the corporation. The firm's strategy or regulatory reporting and compliance responsibilities are vertical business objectives. Maintaining the firm's operational engine of acquiring, servicing and keeping customers are horizontal business objectives.

When augmented with the vertical/horizontal orientation of business processes, this coherent firm-wide perspective enables financial executives to better define and implement more effective risk-management and mitigation programs.

The realization of business objectives creates, supports or otherwise influences the state of the organization's assets and concomitant liabilities. This means that the firm's financial executives must be extremely familiar with the firm's strategies, tactics and operations.

Resources encompass both tangible and intangible assets, ranging from personnel (including their skills and competencies), physical infrastructure, technology as well as capital flows to brand, goodwill and reputation.

Risk incorporates both internal and external factors considered either individually (such as...