Integration of risks and returns in the process of decision making
Risk decision making is the foundation of a value-based ERM framework. Integration of risks and returns in the process of decision making increases the value of the company. Moving from one ERM framework to another requires a laid-out process that evaluates the underlying risks and proposes the best way to deal with them. A new ERM committee at Company ViacomCBS will need to set risk appetite and the risk limits that the company is willing to accept as it moves forward. This will enable the company to have a strong framework for the management of exposure to risks based on their risk tolerances.
Setting a risk appetite helps in analyzing the valuation. Calculating the baseline value of the company sparks productive motions and an analysis of the baseline strategic plans. A new ERM committee will carry out a comparison between the baseline value of the company and the unknown risks that may come up of its value. The ERM committee will also carry a reasonability test, comparing the baseline strategic plans and the accepted risk appetite. These analyses usually shed light on any doubtful outcomes, resulting in advanced inspection of all uncertain assumptions.
Original frameworks develop risk scenarios in their strategic planning process. Such tactics for the development of risk cases are mostly not consistently based on the definition of risk scenarios. A positive view by one person might not match the definition of another person. However, the new ERM will employ a value-based method that solves this limitation by means of a guided procedure referred to as FMEA interviews. FMEA interview approach examines the development of several risk cases based on the set risk appetite. Risks are ranked based on quantitative metrics such as its severity, and the probability of occurring.
The ERM framework will work well in risk mitigation processes especially where the risk residual exposure surpasses the risk tolerance. The ERM framework measures the extent of risk exposure which is mainly based on specific risk exposures for the main risks, and then develops mitigation measures based on the risk appetite and risk limits for the entire company. The Chief Risk Officer and Executive Risk Owners validate information about an impending risk and then develop risk mitigation measures based on the set out risk acceptance limit. The Audit Committee of the board of directors will then examine the viability of the proposed risk mitigation measures and send them to Chief Risk Officer for implementation.
Using an approach that is more objective to define risks helps in avoiding errors. It is very common for the ERM framework to categorize risk appetite into the hard limit and soft limits during the process of the FMEA interviews. The hard limit is perceived to have higher severity and higher occurrence probability than the soft limit. This is because, in risk appetite, risk quantifications are of different magnitudes. The calculation of these risks in a value-based ERM framework is based on projections and discounts, thus they differ in their severity and levels of occurrence.
The main benefit of setting the risk appetite either in the hard limit or the soft limit by the ERM framework is to provide the right arrangement of assumptions to make sure that a valid risk quantification ERM process is developed. The ERM committee should ensure that there is a uniform external assumption condition so that they can develop a functional "what-if" model for the company. A new ERM framework at Company ViacomCBS will link the enterprise risk management to value-based management. The new ERM committee will change the original stagnant forecasts to a dynamic model. Most significantly, adopting the new ERM framework will transform the original strategic risk decision-making process from a single-case projection to several possible severe outcomes founded on a big number of recreations representing different well-analyzed deterministic strategic risk situations defined by risk appetite.
Segal, S. (2011). Corporate value of enterprise risk management. Hoboken (NJ): Wiley.
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