Running head: Drivers of ERM 1

Drivers of ERM

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Student’s name

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Abstract

Enterprise Risk Management (ERM), is an approach aimed at reducing the risks faced by

organizations. Ozna Company is accompany that operates in the oil industry and it is based in 20

different countries worldwide. For some time now, the company has been using the ERM to

manage and handle its risks considering it is a multinational company, the ERM is very helpful.

ERM implementation is not that easy however, there has been some drives that have made the

ERM implementation and usage effective and efficient in the company. The drivers are; legal

and regulatory compliance influences, internal audit effectiveness, increased profitability and

earnings, Top Management commitment, credit rating agencies’ requirement, reduced earnings

volatility, Human Resource competency, and reduced costs and losses. The strategic plan of the

company is based in profits maximization and increased productivity. All the above drivers are

in line with the two strategic plan of the company. It is therefore important that companies and

organizations take ERM seriously for the uncertainty of risks can lead to the total collapse of the

business.
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Drivers of ERM

Introduction

It is every organization’s goal to improve both its performance and its value. Enterprise Risk

Management (ERM) is an approach that emphasizes on assessing and evaluating risks on a

holistic level. ERM is aimed at reducing the risks an organization faces (Gates et al., 2012).

ERM is important in helping organizations deal with uncertainties in their business operations

(Altuntas, Berry-Stölzle & Hoyt, 2011). In the current global economic system, organizations are

experiencing and facing more complex risks that are interconnected and devastating. ERM helps

the organizations view the risks as an opportunity that can benefit the business if well studied

and improve the performance and create more shareholder value (Hillson, 2002). An

organization is prone to certain exposures, both external and internal, leading to risk in their

operation, finance, input, legal, tax, market, fraud, human resources among other business

characteristics (Hamptom et al., 2009). Many firms are faced with the challenge inconsistency of

risk management strategies. This makes many not reap the benefits from the ERM program. To

accrue the benefit obtained from implementing an ERM program, the organization must look at

different drivers. This paper will look into an organization and discuss drivers of ERM that are

present in that organization. The importance of each key driver to the organization will be

analyzed, how it aligns to the strategic plan of the organization, and its contribution to the ERM

efficiency.

Ozna organization

Over the last few years risk management has been a key factor in most organizations. At Ozna

Company understanding and managing risk is considered core in their operations. Ozna is an
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organization that deals with the production of gas and oil. It also does explores, transports,

refines, and markets its produce. Currently, the company is based in 20 countries worldwide.

This company is faced with a lot of challenges ranging from operations, foreign exchange, credit,

interest rates, capacity expansion, health and safety, acquisitions, equity price, and political risks.

With all the possible risks that Ozna faces, it therefore requires that the company comes up with

several mitigations to solve the problems. Aware of all the possible challenges it is prone to,

Ozna Company embraces ERM to identify and address the potential risks methodically. The

utilization of the ERM has helped the organization achieve most if not all its strategic objectives

and goals and Ozna has gained a competitive advantage being one of the dealing forms in the oil

industry. It is necessary that ERM is embedded in the ongoing activities and events of the firm.

The two fundamental elements of ERM that Ozna has followed to the letter are; assessing all

significant risks and implementing the appropriate response to the identified risk. The concept of

risk strategy, appetite, and culture are also implemented into organization, and they show the

determination and attitude of Ozna governance into managing the risks. The management of

Ozna is not left behind either, since they are responsible for the risk architecture and procedure

documentation. From the implementation of ERM into Ozna, certain benefits are evident such

as; the company seems more aware the possible risks it can face and how effectively it can

handle each risk faced. ERM has enhanced the confidence of the company in achieving most of

its goals and objectives, the company is not afraid of coming up with strategic objectives. ERM

has helped the company comply with the legal and regulatory requirements easily, through ERM

the company is aware of the regulatory laws, when they are considered broken, and the legal

consequences. Lastly, Ozna has improved its efficiency and effectiveness in its operation,

making it among the leading firms in the oil industry.

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Key drivers of Enterprise Risk Management (ERM) efficacy

Ozna Company is currently doing exemplarily in the market. It can refer partial success to the

implementation of ERM. Recently Ozna carried out an assessment for its ERM effectiveness and

it was found to be effective. One notable strength with the company is that the management and

the board of governance have a strong relationship that enhances their monitoring structure and

speed in taking corrective measures upon realization of a risk. Effective management, speedy

corrective measures, and adequate mitigation are key in assessing the ERM performance

(Hillson, 2005).

They are certain key drives that enhance the effectiveness and efficacy of enterprise risk

management. Effective risk management goes beyond submitting the risks to the board of

governance to the extremes of reviewing and building strengths that can manage the risks and

build adversity (Ingley et al., 2008).

The key drivers of Ozna Company include; legal and regulatory compliance influences, internal

audit effectiveness, increased profitability and earnings, Top Management commitment, credit

rating agencies’ requirement, reduced earnings volatility, Human Resource competency, and

reduced costs and losses. These drivers are discussed based on why Ozna companies needs them,

how effectively they align to the strategic plan of Ozna, and their contribution to the efficiency

of ERM (Hoyt et al., 2011).

1. legal and regulatory compliance influences

Companies are required to comply with certain laws, polices, and regulations outlined by the

regulatory authorities. Failure to comply with the authorities put the organization into risks. In

many countries the regulatory authorities are exerting pressure on business and organizations to
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improve on their risk reporting and general management (Kleffner et al., 2003). Most companies

especially the publicly listed companies are also experiencing pressure from laws, regulatory

compliance, stock exchange, and corporate governance.

The legal and regulatory compliance influences is a key driver in the ERM efficacy of Ozna. The

oil industry is one faced with many complex laws and regulations regarding the environment and

the health and safety of the people. Several of the influences are aimed to comply with the

health, environment, and safety of the workers. Another aspect to consider during compliance is

that the regulations differ in different countries. Ozna is based in 20 countries, which have

different regulations on different aspects. Ozna as a company is critical in ensuring that is

conversant with all the regulations of the different countries it is based and that they all adhered

to.

As a driver to ERM efficacy, legal and regulatory compliance, aligns itself with the strategic plan

of the organization. The strategic plan of Ozna which is based on the goals and objectives of the

company, is aligned with the potential opportunities the company can get from evading legal

threats and all other threats the company can face from noncompliance. Among the goals of the

company as illustrated in the strategic plan is comply with the legal and regulations from the

regulatory authorities.

Legal and regulatory compliance has contributed to the ERM efficiency through various ways.

With the many compliances Ozna has to oblige, compliances influences has helped it reduce the

legal problems and cases. It has also helped the company improve its operations and safety.

Compliance to rules regarding environment, safety, and health, has the helped the company

operate in a conducive environment which increases its productivity. Compliance also

contributes to the ERM efficacy through enhancing the public relations of the company
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(Andrews et al., 2011). Compliance with legal obligations helps a company provide the best in

employment, recruitment, remuneration, compensation, and general and public policies and

benefits (Paape & Spekle, 2011). Lastly, compliance also plays a huge role in employee retention

in the company. Ozna has the tendency complying with all regulations associated with the

employees, which makes them want to remain in the company for longer years. Legal

compliance therefore enhances the efficacy of ERM in Ozna Company.

2. Top Management commitment

A company’s top management commitment to risk management plays a vital role in the success

of the company. The support and the commitment of the company’s leadership to the threats,

risks, and operation leads to the implementation of the ERM (Manab & Kassim 2012). It is the

duty of the top level management in providing adequate resources, coming up with an effective

structure, and creation of a risk management culture within the organization. The top level

management of every organization should be concerned about the company’s objectives in

relation to the risks identified (Waite, 2001).

Ozna Company’s top level management is committed and competent in supporting the

implementation and the operation of the ERM in the company. The top level management works

closely with the board of management to ensure that a risk is identified in time and the correct

response is also given in time. The company has taken the intuitive to factor risk as an integral

part of the company. With the increasingly technology and the company’s worldwide growth, the

company is faced with various complexities and litigiousness. However, the management and the

board of governors ensures that the organization is takes a balance between the risk taken and

those managed. The management understands the strategic advantage of taking risk that can lead
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to the growth of the company. Ozna’s management has played a key role in the efficacy of ERM

in the organization.

Part of the strategic goal of Ozna is maximization profits and output. The top level management

to risk management aligns with this strategic goal. It through their commitment to risk

management that the company is able to strike a balance between the taking some risks and

managing others depending on the final outcome of the risks.

The top level management commitment to risk ensures that ERM is effective in the company in

various ways. Ozna’s top level management in association with the board of governors, ensure

that the company does not fall into potential loss areas as a result of risks. The company has a

direct role in managing risks through risk oversight. The management enhances the efficacy of

ERM, by ensuring the company is not subject to risk and that it complies with the established

risk management practices.

3. Human Resource Competency

The success of the company partially relies on the competency of the human resource of a

company. Apart from the technical skill required in the human resource, quick adaptability to

change, effective communication, and interpersonal relationships is also essential for the

company’s risk management. The competency of a human resource is linked to its productivity,

firm value, turnover, survival, and financial returns. Risk mitigation in a company is handled by

the company employees, hence their competence is key as s driver of ERM efficiency (Turkey &

Zaman, 2004).

Ozna has been lucky to have competent employees in all its 20 operating centers worldwide.

This driver is has been important to the organization in two main ways. One is that the human
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resource understand, they are a major source of risk. They therefore trey to be competent to

avoid risks. The other importance of human resource competency for Ozna is that, the human

resource is necessary in handling risks. Ozna’s human resource competency has thus ensured that

the risks are avoided and if they occur they are handled fast with a lot of efficiency and

competence.

Ozna Company is very focused on its strategic plan which helps it achieve its short, middle

and long term objectives. Action plan is one of the elements of the strategic plan of the company.

It is the responsibility of the company’s human resource to implement the action plan of the

organization. One of the action plan of the company is to avoid risks and mitigate the risks that

occur. Ozna employees understand the business and its goals and objectives.

Employee competency in Ozna has contributed ERM efficacy in various ways. Communication

and team work is the main. The human resource present in Ozna starting from the top level

management to the employee all have a proper communication channel and work together as a

team. When faced with risks, the human resources communicates about it and together come up

with mitigation methods. The employee also collaborate in identifying and preventing

occurrence of risks within the company. Several of the employees are good at coming up with

reaction plans and responses to risks which is part of competency. The human resource

dedication to avoiding risks occurrence and the mitigation of the already occurred risks is a

major drive in enhancing the efficiency of ERM.

4. Internal Audit Effectiveness

Internal audit is a common profession in many organizations aimed at assisting the organization

in implementing and improving risk management, governance and compliance. Risk based
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internal audit ensures that the company complies with regulations of risk assessment, data

management, communications, control environment, and risk monitoring (Badara & Saidin,

2014). There exist a positive association between internal audit and risk management.

Ozna Company has its own internal team of audits. Since it a big company, it should frequently

be evaluated to ensure that all the requirements are set are required. The company has the risk

management program that is used thorough out the branches. The internal audit makes sure that

Ozna branches comply with the risk management program. The internal audit also guides the

company on loopholes that can lead to potential risks. The Ozna’s auditing team is competent

and therefore ensures that the ERM program of the company is met.

Part of the strategic plan of the company is to avoid avoidable risks and ensure that the risk

management program is met. The internal audit ensures that Ozna Company meets all risk

management policies set by the company. During the auditing process the audit team also

identifies other potential risks the company can face in the future and reports to the risk

management team. The audit team on the other hand verifies that the management has identified,

assessed and responded to the risks the company faces. It also checks of the responses to risks is

effective and efficient. Ozna’s audit team also checks that the risk management processes are

effective with complete action plan and well monitored.

Internal audit contributes to the efficiency of the ERM by ensuring that the risk management

processes are well designed and properly working. It also ensures that the management of the

risks classified as key are given top priority in response and effectiveness. Lastly, Ozna audit

team has ensured that the risks reporting and classification is appropriate, complete and accurate.

Efficiency in internal auditing of Ozna, thus enhances ERM efficiency.

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5. Desire for increased profitability and earnings, reduced earnings volatility, and reduced

costs and losses.

It is the goal of every company to earn more profits and maximize their production. Most if not

all the company goals and objectives are aimed at maximization of production and profit as well

as reduction of costs and losses in the short, middle or long run. This desire therefore pushes the

company to take extra caution while handling and managing risks. Occurrence of risks have a

tendency of bringing the company down through financial losses and benefits; an aspect of

volatility. Coming up with risk strategies, risk responses and implementing them is a milestone

in increasing profitability within an organization, reducing earnings volatility, costs and losses

(Beasley et al., 2009).

Ozna Company has many 20 branches worldwide that supply to different countries in the world.

It has the company of increased productivity. It operates under the slogan that amount of money

invested into the company has the mandate to yield profits. The desire for the company to

account for all their investment through earning has made the company cautious in taking and

managing risks. Ozna Company also seems to be driven be the desire to reduce earnings

volatility. A company that does not account for its earnings tends to be extravagant in their

miscellaneous expenditure. The company accounts are balanced on a monthly basis to determine

the amount of earnings and to notice the volatile loopholes that earnings could possibly go to.

Implementation of ERM at Ozna is aimed at reducing the adversity of risk in the company. The

desire to increase the company earnings and to avoid the loopholes of volatility increases the

efficiency of ERM. Ozna Company uses ERM as one of the strategies to improve profit, avoid its

volatility, increase sales revenue, and decrease cost as well. The ERM strategy has helped the

company know which profitable fields to prioritize and focus on complying with the set
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regulations. The company is dependent on risk assessment and management in its major

decisions and projects with the aim of reducing cost and losses as well as increasing the profit

margin of the business.

6. Requirement by credit rating agencies’

When making huge well thought investment, companies tend to take up loans to increase

their capital to purchase inventory, equipment, or expand operation. Most of the credit

agencies will require the company to provide a creditworthiness from a credible credit rating

agency for the loan to be processed (Turkey & Zaman, 2004).

Ozna Company has severally in the past taken loans to complete some of its major projects.

For example when the is setting up some of most of its branched huge initial investment is

required, and because the firm cannot exhaust all its earnings on the project, the company

mostly tend to take half the investment as a loan, that it can gradually repay. To qualify for

the loans the company just be credit worth to the borrower. Therefore, creditworthiness is a

requirement and a financial obligation of the borrower to the creditor. Properly managing

risks increases the creditworthiness of the company. To avoid being creditworthiness the

company ensures that all risks all properly handled and managed. Project investment is risks,

which makes the creditor want to confirm that the firm is capable of handling risks to avoid

the company going into a turmoil.

With the understanding that creditor has to check at the creditworthiness of the company,

Ozna ensures that it handles and manages all its risks efficiently. This therefore enhances the

efficiency of ERM in the company.

Conclusion
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This study is aimed at identifying drivers of ERM at Ozna Company and indicate its

relevance to the company, how well it is aligned with the company’s strategies, and its

contribution to the ERM efficacy. Ozna as a company, has its most of its strategic rotating

around increased production and profit maximization. The identified drivers such as

compliance influences, internal audit effectiveness, increased profitability and earnings, top

management commitment, credit rating agencies’ requirement, reduced earnings volatility,

human resource competency, and reduced costs and losses have all played a part in

increasing and enhancing the efficiency of ERM in the company.

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