Enterprise risk management: Take a balanced scorecard approach

Enterprise risk management (ERM) is an effective tool to help directors manage risk and fulfill their fiduciary responsibilities to the organizations they serve, particularly today as many groups struggle to differentiate their offerings and compete. To fully protect the organization, risk management needs to encompass much more than traditional financial concerns. Instead, organizations should consider implementing a broader “balanced scorecard” approach to managing risk.

The balanced scorecard is not new; many organizations have used it successfully over the years to improve performance. The same ideas also apply to identifying key risks — and opportunities to minimize them — enabling you and your organization to amplify the impact of your resources.

But getting your arms around an ERM process to identify and prioritize both internal and external risks facing your organization — and communicating with directors about those risks in a clear and productive way — isn't always intuitive, especially if you're starting from scratch. The following key steps can help you establish and maintain an

1. Designate a project leader. Often, the chief operating officer or chief financial officer is well-suited for this role. For best effect, the individual you designate should possess a strategic mindset coupled with strong organizational and people skills.
2. Meet with each director-level staff person individually to brainstorm the universe of potential risks related, but not limited, to key areas of your organization, such as its:
   • Products and services
   • Programs
   • Ability to attract and retain talent
   • Potential competitors, both in and outside your industry
3. Categorize each item from your brainstormed list. Useful categories might include:
   • People: These are your employees and volunteers, your board members, your donors, clients, and the public at large.
   • Revenue: This includes income that comes from events and course registrations, sales of products, and grants, donations, and investment income.
   • Goodwill: This includes your reputation and perception by the community, which directly impacts your ability to fundraise and attract prospective volunteers, staff, board members, and other individuals who are important to your organization's success.
   • Property: This includes both physical and intellectual property, such as buildings and other facilities, equipment, and materials as well as copyrights and trademarks.   
4. Share the categorized list of risks with executive team members. The executive team should evaluate 1) the likelihood and 2) the potential negative impact of each risk in the short run. Most organizations use a numerical weighting system that allows individuals to readily identify which risks have the most impact on the organization. The best system for your organization might not be numerical — it could employ the use of letters, colors, or something else entirely. The key is to use a method that best allows individuals to quickly understand which risks have the biggest impact and those that need attention. Next, the executive team should identify specific action steps to mitigate or respond to each of the risks identified. The vetted risks and action steps will form the basis for the balanced scorecard approach going forward.
5. Use the scorecard as the basis for additional, ongoing conversations about risk exposure at the board level. Include the scorecard as part of your orientation package as you bring new directors on board. Update and review the scorecard at least annually.

Staff and directors alike benefit when organizations take a balanced scorecard approach to ERM. Such an approach keeps risk exposure and mitigation top of mind as management allocates resources and develops product, service, and programming offerings during business planning. For directors, the balanced scorecard offers a comprehensive but concise vehicle to ensure the board is meeting its fiduciary responsibility. With a balanced scorecard in place, both management and directors have a shared means by which to optimize often limited organizational resources — and gain peace of mind.

If you would like to discuss how a balanced scorecard process can help your organization, contact us today.