In recent times, managing risk is top of mind among financial industry executives – and that isn’t surprising. With the economic crisis still a fresh and painful memory, no one wants a do-over. The lack of knowledge about unknown or unexpected risks led to huge losses and the closure of many long-standing institutions. No wonder more credit unions are paying attention to Enterprise Risk Management (ERM).
Increased awareness of ERM is a good thing, causing a growing number of senior managers to analyze their current risk capabilities. But sadly, many don’t look deeply or broadly enough, believing their existing procedures are sufficient. No doubt, credit unions generally have solid risk processes in place. Unless they are under regulatory pressure or face substantial operational issues, their need to undertake comprehensive ERM seems minimal.
And that can be a problem. Too many credit unions view ERM as a reactive process – something to initiate when there’s an issue at hand. Instead, they should look at ERM as a proactive process. Viewed holistically, ERM helps credit unions create opportunities and better adjust to negative events by identifying, measuring, and managing risks before they occur.
Well-executed ERM seeks to answer four key questions:
What will drive the credit union’s future success?
How does the credit union strengthen its position in the competitive market?
What situations can the credit union not afford to have happen – and how will it react when such events do occur?
How does the credit union leverage risk taking to enhance and strengthen financial returns?
No matter the institution’s size, the CEO and senior management can’t see everything, and no organization can effectively manage what it can’t see. For successful decision making, it’s important to seek organization-wide input. ERM helps create such a culture.
Expertise And Knowledge
ERM requires a new take on people’s job responsibilities and work environment. Credit unions should harness their own institutional knowledge to build an ERM framework, educating employees, board members, and other stakeholders on the value of ERM and what it means to them and the credit union. ERM should be an integral part of the operating philosophy – not simply another set of performance expectations. This will help bring long-term value to ERM efforts.
Transparency And Dialogue
To maximize the effectiveness of an ERM approach, organizations must be open and transparent. ERM is marginalized when there is poor information flow, work functions in silos, or growth opportunities are limited. ERM does requires a cultural shift that involves taking an honest look at the business. It demands a healthy discussion of the potential risks and problems the credit union faces, as well as the opportunities.
Board And Management Commitment
Undoubtedly, the most important key to a winning risk-management strategy is a demonstrated commitment to ERM by a credit union’s board and management team. These individuals must leverage ERM in their decision-making processes, making sure to provide the needed resources, set appropriate expectations, and create accountability.
ERM works to improve a credit union’s financial and organizational performance – not only when issues or challenges surface, but also when business is going well. More than simply initiating a new program, ERM is a change in perspective throughout the organization to best position your credit union for future prosperity.
Tony Ferris is managing partner at The Rochdale Group, a credit union consulting firm specializing in Enterprise Risk Management. You may contact him at (800) 424-4951 or visit www.rochdalegroup.com for more information.