What is ERM for a Community Bank?

The OCC has created capital guidance that will push more community banks to adopt an enterprise wide risk management approach.  Most community bank CEO's want to know "What is ERM or enterprise risk management?" To them it is another compliance matter they must deal with. We want to take a few minutes to give you a more useable definition of ERM. This might help you see why ERM is becoming increasingly popular with community bankers and credit unions.

The Treadway Commission's Committee of Sponsoring Organizations (COSO) first formally defined ERM in 2004. The COSO team describes the need for ERM as arising from, "a series of high-profile business scandals and failures where investors, company personnel and other stakeholders suffered tremendous loss." The purpose of their initial report on ERM was to better enable management to meet its most critical challenge of "determining how much risk the entity is prepared to and does accept as it strives to create value."

In its most simple form we describe ERM this way: "ERM is the process of managing the gap between business strategy and execution of that strategy."

One of my early mentors used to say that "ideas are money and execution is for monkeys". After managing a large part of a large financial institution myself, today I would beg to differ with this comment. From experience, you and I both know that ideas are truly a dime a dozen. Making ideas a reality is where the rubber hits the road. The reason implementation is difficult is because there is a "gap" between the idea and the implementation. 

As my grandfather used to say, "boy you don't know what you don't know". This gap that is so difficult to overcome - the one between strategy and execution - is uncertainty. Uncertainty is the definition of risk. So, when we talk about managing risk on an enterprise wide basis we are really saying "let's see if we can do something about issues we know about or should know about that could stop or slow down what we are trying to accomplish for the shareholders and for our customers." ERM is truly the process of managing the gap between strategy and execution. 

ERM in its best and most usable form uses the existing management team and structure. However, a process is created to help management measure, track and implement business strategy and implement changes necessary to reduce risks that could impair that strategy. In either case, the result is more certain strategy implementation.

As a key manager of risk in your community financial institution, what are some unknown issues that have become a reality and stopped or slowed execution of strategy in your organization?