Enterprise Risk Management (ERM) Education Now A Necessity

A ‘grey rhino’ is a high-probability, high-impact event. The pandemic has caused some to raise a valid question: is this just a one-off event that was not predictable? Another question: is risk management just a new management jargon or is it something real? The fact of the matter is that risk management process as a concept has existed for centuries, from kings who were managing their territories to business owners who were managing their businesses. So, what has changed that we have now started talking about it only in recent years?

Some important factors which have changed the game are:

  • Owner-driven enterprises moving to professionally managed CXO structures
  • Ownership is now distributed with public participation through equity, which needs to have a lot more transparency and avoid uncertainties
  • Appointment of regulators who have a solemn duty to protect investor interests at the same time bringing about a set of regulations that will bring uniformity in similar business operations
  • Where the business environment is becoming increasingly complex and uncertain that any wrong decision can impact investor confidence.

Let’s look at some of the important events that happened within the last decade which have had a significant impact on businesses:

  1. Economic Issues: The biggest event during the period 2013-2015 was crude oil prices which almost touched $110 a barrel and put the developing economies under huge amounts of financial pressure. Countries like India, totally dependent on crude to fuel economic growth – were unable to pass on increased prices to their citizens and had to partially bear the costs. This in turn had an impact on the various development work of these countries. These developing nations are large consumption-driven economies and the inability of governments to inject cash into the economy impacted consumption with lowered demand. On the other hand, because of the spiralling effect of crude prices and the weakening of domestic currency against the US Dollar, economies had to handle inflationary trends.
  2. Environmental Issues: Tsunamis, earthquakes, cloudbursts and floods, and extreme droughts in many parts of the world which were hitherto far and few, have now become a regular feature. Large-scale destruction to standing crops, inundated cities and business disruptions are now quite frequent – for instance the Mumbai floods, Uttarakhand disasters, plus floods in some of the rivers that are destroying large tracts of land. While excessive water is a problem, lack of rain and drinking water is another set of problems that lead to droughts. Citizens in some parts of the world do not even have water to drink. Climatic factors are so volatile that countries face a very uncertain future.
  3. Geo-political Issues: Border disputes, the possible war in Asia and unstable governments continue to pose business uncertainty. The economic supremacy of countries like the US, Russia, and China – and their rivalries – has also increased.
  4. Social Issues: India and other developed countries have seen large-scale discrimination on caste/race and other factors. Coupled with this, large-scale income disparities have made the situation worse for consumers whose purchasing power has reduced significantly. Governments have also adopted extreme right-wing or extreme left-wing policies, making business more and more complex.
  5. Technological Issues: The last decade has seen the emergence of social media and digital infrastructure which has been a great business enabler – but has come with huge cyber risks, fraud risks and information security risks.

The WEF and other research agencies have been predicting that in addition to the above risks already existing, the spread of infectious diseases and the collapse of health Infrastructure is another major risk that will affect the world. These factors have put risk professionals at the forefront to help guide businesses in proactively identifying these risk issues and mitigating them. It is important to note that risk managers are not a breed of futurists who can accurately predict what will hit businesses – but professionals who base their judgements on events of the past and emerging trends. They help business leaders to foresee the unforeseen and draw up plans to mitigate them proactively. This means that risk managers also need to be trained to look for issues across the globe and apply them to their business environment. They also need to sift the issues which can have a material-long-lasting impact on their business from the routine ones. In some cases, risks may be inherent like the business, for example, commodity risks or exchange risks. In these cases, risk managers may have to develop risk appetites that provide the business with a guardrail to play within the set parameters.

Leading Institutions like the IRM play a very important role in training young managers in ‘Risk Thinking’ which is now developing into a core competency. Such skills need to be developed and talents nurtured. Regulators are now becoming increasingly aware of the need to protect investor interests and remove uncertainty in business operations.

The formation of Board-level Risk Committees is a step in the right direction. Such committees now deep-dive into existing and emerging risks over short-medium-long terms. This has helped risk managers to facilitate internal discussions with risk owners to come up with mitigation plans and also monitor implementation. Successful businesses are now acknowledging the role played by risk managers in proactively mitigating risks and helping businesses get back into action at the right time. To conclude never has there been a better time than now for risk managers to contribute positively to their respective organisations and help them navigate through difficult and unpredictable times.

Download the IRM-AICTE Report on Enterprise Risk Management and the Indian Higher Education System

Blog Author: V Swaminathan, Head – Corporate Audit and Assurance and Chief Risk Officer, Godrej Industries Limited


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