The Power of Feedback Loops
By: Todd Cooper
Enterprise risk management (ERM) is a practice that has gained momentum in response to the global financial crisis. Across the financial services industry, ERM is moving to the center of strategic decision making and many institutions are revamping their entire approach to better understand and mitigate the risks that they face.
Today, managing risk is a continual process of systematically assessing, measuring, monitoring and managing risks in an organization. Effective risk management ensures that the “big picture” is not lost to the daily demands of running a business. Infusing a risk management strategy into an organization’s culture helps ensure that employees are focused on identifying and anticipating potential risks rather than ignoring their existence.
How do we know if risk management is working effectively? One way is through establishing a risk management “feedback loop” to continually assess whether the assumed risk is reasonable and appropriate, or whether the situation should be reassessed. Increasingly, boards and senior executives are looking to develop effective key risk indicators (KRIs) to drive the effectiveness of their ERM process and improve the execution of the organization’s strategy while pushing responsibility and accountability into the front-line business units. These KRIs serve as a type of feedback loop, providing organizations with an early warning sign of increasing risk exposure in various areas of the enterprise.
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