The concept of Enterprise Risk Management (ERM) sprung from the shortcomings of Value Based Management (VBM). This approach does not take into consideration the relative change between risk dynamic and the dynamic of value. Forgetting this type of analysis led in the past to instances of a very satisfactory and high increase in value, even though the company went bankrupt. Therefore, in the business environment, we have to estimate the value-to-risk ratio to determine if the company condition is improving or deteriorating. To make it real and decline the default risk, a new approach to company risk management has to be assumed, which can be summarized as Enterprise Risk Management (ERM).
There are several specific approaches to ERM because it is very much related to the individual business context of any enterprise, therefore each business has to find an individual “suit.” Enterprise Risk Management can be defined as an integrated and holistic approach to credit risk, market risk, operational risk, business risk, and economic capital management. This includes risk control, mitigation, and risk transfer to maximize value of the company. Successful ERM implementation takes a long time and requires engagement of all the managers within the company. ERM requires advanced tools and analytical methods as well as some different approaches to managerial accounting when reflecting financial results on the balance sheet
Author: Zbigniew Krysiak PhD
Source: “Graziadio Business Report”
Subject: Risk Management
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