1.1 Introduction
The underlying principle of enterprise risk management is that every entity exists to provide value for its stakeholders. All entities face uncertainty, and the challenge for management is to determine how much uncertainty to accept as it strives to grow stakeholder value. Uncertainty presents both risk and opportunity, with the potential to erode or enhance value. Enterprise risk management enables management to effectively deal with uncertainty and associated risk and opportunity, enhancing the capacity to build value. This paper seeks to explain the ERM process, its history, approach and practice.
1.2 Summary of Enterprise Risk Management principle
The ERM approach differs from the traditional risk management approach as the focus is placed on an enterprise-wide strategy. Meilbroek (2002) argues that in order to achieve integrated risk management, a company must review and assess all the risks that could potentially affect its value. This core principle of ERM ensures that senior managers' focus is engaged on the uncertainties around the company's entire asset portfolio.
A second fundamental concept of ERM relates to the people that carry out and manage the process. Although ERM is the ultimate responsibility of the board of directors with the support of senior management, (i.e. a top-down process) it must be noted that in order for the approach to be enterprise-wide, every employee from every level of the organisation must support the framework. Without everyone's support into the process, the ERM infrastructure would be worthless. (Meilbroek 2002, 55 - 66)
Furthermore, as discussed in Protiviti's bulletin paper (2006), companies will need to be aware that they will require to be open and flexible to change. The ERM initiative can change organisational behaviour with the need for "building awareness, developing buy-in and ultimately