There is an associated risk with every activity an organization performs. Whether it be related to decision-making, business strategies, or business objectives, there is an integrated risk of inefficiency or complete failure in each of them. According to Statisticbrain, a research institute, 50% of U.S. companies fail in their first five years and 70% fail in the first 10 years. Two reasons stated by Statisticbrain are poor decision-making and a lack of preparations. It shows the importance of compliance and risk management.
As organizations understand this crucial fact, they do not just try to avoid or mitigate risks but see risks as a value-driven factor. They make parameters for acceptable risks in each department, align them, and prepare a risk management plan. To do it efficiently, organizations need to build a robust compliance and risk management infrastructure that creates, governs, and delegates risk management expectations.
There are three building blocks to a risk management infrastructure:
The first step toward building the structure is to standardize the definition of potential risks. After creating a common risk language, organizations need to make it standard for all the departments. It helps the board of directors and stakeholders make the same interpretation of valid risks.
Once the information becomes clear, the next step is to set up a process to transfer it from the risk governing bodies (CEO and CRO) to the whole enterprise. It avoids wastage of efforts and duplication of actions as the information is common throughout the enterprise.
When organizations get a clear insight of their risk management expectations, they can delegate the role and responsibilities more efficiently. It helps them establish a strong foundation for a compliance and risk management infrastructure.
The second step is to teach the importance of compliance and risk management to employees. It includes giving lessons on corporate philosophy, internal audit, and business ethics. Organizations should do role-based training and offer a risk-aligned reward to keep their employees motivated during the learning process. It is crucial to keep the lessons comprehensive to all the domains instead of just boards and executives.
After talent management, it is trivial to assign roles. Organizations need to analyze each employee’s knowledge and expertise in compliance and risk management. Organizations can create separate committees, teams, and departments based on the chosen employees to make the process more efficient.
Information technology acts as a supportive element for a compliance and risk management infrastructure. GRC tools supply reliable information (related to sensitive operations) to all the employees. It eliminates redundancy as GRC tools integrate transactional, operational, and financial information. The integration helps organizations to identify and resolve risk more effectively and efficiently. It also allows organizations to predict, prevent, and manage risks (internal and external) that may create hindrance to their objectives.
GRC tools enable organizations to provide the right risk information in sufficient quantity to the required people. It helps them understand the risks acquainted with the decisions they must take in daily business activities. It also provides clearance of real-time information to the entire organization.
Five tools that facilitate a robust compliance and risk management infrastructure:
- Practical Threat Analysis (software tool and methodology)
- The GRC Stack (suit of resources)
- Open Risk & Compliance Framework and Tool (ORICO) (Application)
- GLPI (open source asset management tool)
- STREAM (GRC software platform)
Building a substantial compliance and risk management infrastructure – five blocks
The reporting block provides risk-related information to board of directors, executives, and the management team. It indicates all the factors that support the creation of a risk-free organization.
It helps organizations to create a dynamic compliance and risk management environment. Organizations can have a different viewpoint of their needs such as guiding authorities when needed and delegating roles.
This block connects alienated functions of an enterprise. It helps them transform separate operations into cohesive processes. It includes process management, process integration, and activity monitoring.
4. Monitoring and testing
This block transcends the control activities like automation and tracking of business components. It provides effectiveness, reliability, and support to the on-time decisions of a business.
It covers the set of rules that an organization applies to managing data and communicating information among its employees. Data management is an essential aspect of a risk management infrastructure. For example, if an organization stores its customer data in distinct repositories and none of them signifies their correct identification, the information becomes redundant.
Organizations must link their operations, employees, and technology in a synchronized manner to build a stable compliance and risk management infrastructure. They need to communicate the risk-related information to all their employees and make them aware of their roles associated with managing and controlling it.
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.
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