COSO ERM Public Exposure Executive Summary PDF
COSO ERM Public Exposure Executive Summary PDF
Public Exposure
Enterprise Risk Management
Aligning Risk with Strategy and Performance
Executive Summary
To submit comments on this Public Exposure Draft, please visit www.erm.coso.org. Responses are due by September 15, 2016.
Respondents will be asked a series of questions. Those questions may be found on-line at www.erm.coso.org and in a separate document provided
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Written comments on the exposure draft will become part of the public record and will be available on-line until December 31, 2016.
This project was commissioned by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), which is dedicated to providing thought leadership
through the development of comprehensive frameworks and guidance on internal
control, enterprise risk management, and fraud deterrence designed to improve organi-
zational performance and oversight and to reduce the extent of fraud in organizations.
COSO is a private sector initiative, jointly sponsored and funded by:
• American Accounting Association
• American Institute of Certified Public Accountants
• Financial Executives International
• Institute of Management Accountants
Public Exposure
©2016 All Rights Reserved. No part of this publication may be reproduced, redistributed, transmitted, or displayed in any form or by any means
without written permission of COSO and PricewaterhouseCoopers LLP. 5062-02 0516
Foreword
In keeping with its overall mission, the COSO Board commissioned and published in 2004 Enterprise
Risk Management—Integrated Framework. Over the past decade, that publication has gained broad
acceptance by organizations in their efforts to manage risk. However, also through that period, the
complexity of risk has changed, new risks have emerged, and boards have enhanced their aware-
ness and oversight of enterprise risk management while asking for improved risk reporting. This
update to the 2004 publication addresses the evolution of enterprise risk management and the need
for organizations to improve their approach to managing risk in today’s business environment.
The new title, Enterprise Risk Management—Aligning Risk with Strategy and Performance, recog-
nizes the increasing importance of the connection between strategy and entity performance. The
updated content offers a perspective on current and evolving concepts and applications of enter-
Public Exposure
prise risk management. The second part of the publication, the Framework, accommodates different
viewpoints and organizational structures, and enhances strategies and decision-making. In short,
this update:
• Provides greater insight into the role of enterprise risk management when setting and
executing strategy.
• Enhances alignment between performance and enterprise risk management.
• Accommodates expectations for governance and oversight.
• Recognizes the globalization of markets and operations and the need to apply a common,
albeit tailored, approach across geographies.
• Presents new ways to view risk to setting and achieving objectives in the context of
greater business complexity.
• Expands reporting to address expectations for greater stakeholder transparency.
• Accommodates evolving technologies and the growth of data analytics in supporting
decision-making.
It also sets out core definitions, components and principles, and direction for all levels of manage-
ment involved in designing, implementing, and conducting enterprise risk management practices. As
well, for those who are looking for an overview of these topics (boards of directors, chief executive
officers, and other senior management), we have prepared this Executive Summary.
Readers may also wish to consult a complement to this publication, COSO’s Internal Control—
Integrated Framework. The two publications are distinct from each other and provide a different
focus; neither supersedes the other. However, they do overlap. Internal Control—Integrated
Framework encompasses internal control, which is referenced in part in the updated publication,
and remains viable and suitable for designing, implementing, conducting, and assessing internal
control, and for consequent reporting.
The COSO Board would like to thank PwC for its significant contributions in developing Enterprise
Risk Management—Aligning Risk with Strategy and Performance. Their full consideration of input
provided by many stakeholders and their insight were instrumental in ensuring that the strengths of
the original publication have been preserved, and that text has been clarified or expanded where it
was deemed helpful to do so. The COSO Board and PwC together would also like to thank the Advi-
sory Council and Observers for their contributions in reviewing and providing feedback.
Board Members
Robert B. Hirth Jr. Richard F. Chambers Mitchell A. Danaher
COSO Chair The Institute of Internal Auditors Financial Executives International
PwC—Author
Principal Contributors
Miles E.A. Everson Dennis L. Chesley Frank J. Martens
Engagement Leader and US Project Lead Partner and Project Lead Director
Advisory Leader Global Risk Leader Vancouver, Canada
New York, USA Washington DC, USA
greatly over the past few decades. But the margin for error is shrinking. The World Eco-
nomic Forum writes of the “increasing volatility, complexity and ambiguity of the world.”1
That’s a phenomenon we all recognize. Organizations find challenges impacting reliabil-
ity, relevancy, and trust. Stakeholders are more engaged today, seeking greater transpar-
ency and accountability for managing risk. Even success can bring with it risk—the risk
of not being able to fulfill unexpectedly high demand or the ability to maintain business
momentum that has become an expectation, for example.
4. Organizations need to become more adaptive to change. They need to think strategically
about how to manage the increasing volatility, complexity, and ambiguity of the world,
particularly at the senior levels in the organization and in the boardroom where the stakes
are highest.
5. Enterprise Risk Management—Aligning Risk with Strategy and Performance includes a
Framework for boards and management in organizations of all sizes. It demonstrates
how integrating enterprise risk management into an organization helps to accelerate
growth and enhance performance by more closely linking strategy and objectives to both
risk and opportunity. The Framework contains principles they can apply—from strategic
decision-making through to execution. Integrating enterprise risk management through-
out an entity provides a clear path to creating, preserving, and realizing value.
6. Below, we describe why the enterprise risk management framework makes sense for
use by senior management and in the boardroom, what enterprise risk management
has achieved, and how it can do more to inform and help shape strategy and improve
decision-making.
1 The Global Risks Report 2016, 11th edition, World Economic Forum (2016).
2 The Framework uses the term “board of directors” or “board,” which encompasses the governing body, includ-
ing board, supervisory board, board of trustees, general partners, or owner.
3 This Executive Summary uses the term “entity” when referring to any form of for-profit company, not‑for‑profit
organization, or government body.
10. Once strategy is set, enterprise risk management provides within the organization. Enterprise
an effective way for a board to fulfill its risk oversight role risk management is broader and
by knowing that the organization is attuned to risks that can includes practices that manage-
impact strategy and is managing them well. Boards are under ment puts in place to actively
greater scrutiny than ever before about how they oversee risk. manage risk to appropriate levels.
They need to create trust and instill confidence in their stake-
Enterprise risk management
holders—many of whom are growing louder in demanding
addresses more than internal
accountability and transparency. Enterprise risk management
control. Internal control is an
is one more step toward fulfilling their responsibility.
integral subset of enterprise risk
management. But enterprise risk
management also addresses other
What Enterprise Risk Management Has topics such as setting strategy,
Achieved governance, communicating with
11. COSO published Enterprise Risk Management—Integrated stakeholders, and measuring
Framework in 2004. Its philosophy was to help entities better performance. Its principles apply
protect and enhance stakeholder value: “Value is maximized at all levels of the organization and
when management sets strategy and objectives to strike an across all functions.
optimal balance between growth and return goals and related Enterprise risk management is not
risks, and efficiently and effectively deploys resources in a checklist. It is a set of principles
pursuit of the entity’s objectives.”4 Since then, the Framework on which processes can be built
has been used successfully around the world and across for a particular organization, and it
industries and in organizations of all types and sizes to identify is a system of monitoring, learning,
risks, manage those risks within a defined risk appetite, and and improving performance.
support the achievement of objectives.
Enterprise risk management
12. Yet, as we’ve seen the Framework applied in practice, we’ve can be used by organizations of
recognized that it has the potential to be used more exten- any size. If an organization has
sively. We realized that certain aspects would benefit from a mission, a strategy, and objec-
more depth and clarity, as well as greater insight into the tives—and the need to make
links between strategy, risk, and performance. Therefore, the decisions under uncertainty—then
updated Framework in the current publication: enterprise risk management can be
• More clearly connects enterprise risk management applied. Enterprise risk manage-
with a multitude of stakeholder expectations. ment can and should be applied by
all kinds of organizations, from small
• Positions risk in the context of an organization’s shops to community-based social
performance, rather than as the subject of an isolated enterprises to government agencies
exercise. to Fortune 500 companies.
15. That’s where enterprise risk management—defined as the culture, capabilities, and prac-
tices, integrated with strategy and execution, that organizations rely on to manage risk in
creating, preserving, and realizing value—comes into play. Organizations that integrate
enterprise risk management can obtain a range of benefits, including (though not limited to):
• Increasing the range of opportunities: By considering all possibilities—both pos-
itive and negative aspects of risk—management can identify new opportunities
and unique challenges associated with current opportunities.
• Identifying and managing risk entity-wide: Every entity faces myriad risks that
can affect many parts of the organization. Sometimes a risk can originate in one
part of the entity but impact a different part. Consequently, management identi-
fies and manages these entity-wide risks to sustain and improve performance.
• Reducing negative surprises and increasing gains: Enterprise risk management
allows entities to improve their ability to identify risks and establish appropriate
responses, reducing surprises and related costs or losses, while profiting from
advantageous developments.
• Reducing performance variability: For some, the challenge is less with surprises
and losses and more with variability in performance. In addition, performing
ahead of schedule or beyond expectations may cause as much concern as
performing short of scheduling and expectations. Enterprise risk management
allows entities to anticipate the risks that would impact performance and enable
them to put in place the actions needed to minimize disruption.
• Improving resource deployment: Obtaining robust information on risk allows
management to assess overall resource needs and enhance resource allocation.
16. Further, an entity’s medium and long‑term viability depends on its ability to anticipate and
respond to change, not only to survive but also to evolve and thrive. That capability is
called “enterprise resilience,” and it is increasingly important as the business environment
becomes more uncertain and the pace of change accelerates. Fortune 500 companies
with multiple business units and loyal customers cannot easily “pivot” their strategies
in the face of change the way smaller organizations can. Regardless of size, strategies
need to stay true to their mission. And all organizations need to exhibit traits that drive an
effective response to change, including agile decision-making, the ability to respond in a
cohesive manner, and the adaptive capacity to pivot and reposition while maintaining high
levels of trust among stakeholders.
17. These benefits highlight the fact that risk should not be viewed solely as a potential con-
straint or challenge to executing a strategy. Rather, the change that underlies risk and the
organizational responses to risk also give rise to strategic opportunities and key differen-
tiating capabilities. As such, the role of risk in selecting and evaluating a strategy requires
deeper consideration.
technology infrastructure up to the task? These are the kinds of questions that executives
grapple with every day and that are fundamental to executing a strategy.
21. However, risk to the chosen strategy is only one aspect of risk to consider. As this Frame-
work emphasizes, there are two additional aspects to enterprise risk management that
can have far greater effect on an entity’s overall risk profile.
22. Central to decisions that underlie selection of a strategy, the second aspect is the possi-
bility of strategy not aligning with an organization’s mission, vision, and core values. Every
entity has a mission, vision, and core values that define what it is trying to achieve and
how it wants to conduct business. Some are skeptical about organizations truly embrac-
ing their corporate credos. But mission, vision, and core values have been demonstrated
to matter—and they matter most when it comes to managing risk and remaining resilient
during periods of change.
23. A chosen strategy must support the organization’s mission and vision. A misaligned strat-
egy increases the possibility that the organization may not realize its mission and vision, or
may compromise its values, even if a strategy is successfully executed. Therefore, enter-
prise risk management considers the possibility of strategy not aligning with the mission
and vision of the organization.
24. Then there is a third aspect. When management develops a strategy and works through
alternatives with the board, they make decisions on the trade-offs inherent in the strategy.
Each alternative strategy has its own risk profile—these are the implications from the strat-
egy. The board of directors and management need to consider how the strategy works in
tandem with the organization’s risk appetite, and how it will help drive the organization to
set objectives and ultimately allocate resources efficiently.
25. Additionally, alternative strategies are built on different assumptions, and those assump-
tions are sensitive to change in different ways. Change may come in the form of rates of
innovation, customer behaviors, shifting employee capabilities, competitive responses,
regulatory shifts, geopolitical developments—or just about any other factor that upends
the assumptions behind a strategy. Boards should want to understand these sensitiv-
ities—the implications from the strategy—before they approve a strategy. They should
also monitor business developments to ascertain whether these assumptions continue to
remain valid, and if not, what actions need to be taken, including revisiting strategy.
26. Here’s what’s important: Enterprise risk management is as much about understanding the
implications from the strategy and the possibility of strategy not aligning as creating an
inventory of all risks within the organization. These considerations are why enterprise risk
management, as depicted below, can be so valuable in the strategy-setting process.
Executive Summary
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Mission, Vision, Strategy and Enhanced
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Form the initial expression Objectives
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27. Enterprise risk management, as it has typically been practiced, has helped many organizations iden-
tify, manage, and mitigate risks to the strategy. But the most significant causes of value destruction
are embedded in the possibility of the strategy not supporting the entity’s mission and vision and
the implications from the strategy. Analyses of underperforming organizations reveal that they lost
their way because of strategic blunders (possibility of and implications from), rather than operational
errors, compliance faults, or external events (risks to).
28. Enterprise risk management helps to make the evaluation of strategy rooted in the decisions made
by senior management much clearer. It clarifies how strategy selection can be enhanced. Choosing
a strategy calls for structured decision-making that analyzes risk and aligns budgets and activities
with the mission and vision of the organization.
IS E RIS K MANAGE
R PR ME
NTE NT
E
Risk Governance Risk, Strategy, Risk in Execution Risk Information, Monitoring Enterprise
and Culture and Objective-Setting Communication, Risk Management
and Reporting Performance
1. Exercises Board Risk 7. Considers Risk and 12. Identifies Risk 18. Uses Relevant 22. Monitors Substantial
Oversight Business Context in Execution Information Change
2. Establishes Governance 8. Defines Risk Appetite 13. Assesses Severity 19. Leverages 23. Monitors Enterprise
and Operating Model of Risk Information Systems
9. Evaluates Alternative Risk Management
3. Defines Desired Strategies 14. Prioritizes Risks 20. Communicates Risk
Organizational Behaviors Information
10. Considers Risk while 15. Identifies and Selects
4. Demonstrates Commitment Establishing Business Risk Responses 21. Reports on Risk,
to Integrity and Ethics Objectives Culture, and Performance
16. Assesses Risk
5. Enforces Accountability 11. Defines Acceptable in Execution
Variation in Performance
6. Attracts, Develops, and 17. Develops Portfolio V iew
Retains Talented Individuals
Looking Forward
32. Enterprise risk management helps boards do their job better. Every board has an oversight role,
helping to prevent the destruction of value. Traditionally, enterprise risk management has played
a strong supporting role. Now, boards are increasingly expected to contribute to value creation
through oversight and involvement in vetting strategy. Enterprise Risk Management—Aligning Risk
with Strategy and Performance makes the connection clearer.
33. An important way that directors fulfill their responsibilities is through probing dialogue that not only
tests assumptions but also draws out insights into strategy selection and ultimately enables better
decisions. Specifically, boards should consider asking different kinds of questions about risk and
resilience to their leadership in order to enhance the dialogue with management to include the more
Public Exposure
Acknowledgments
37. A special thank you to the following companies and organizations for allowing the participation of
Advisory Council Members and Observers.
23 principles
1. Exercises Board Risk Oversight—The board of directors provides oversight of the strategy and
carries out risk governance responsibilities to support management in achieving strategy and busi-
ness objectives.
2. Establishes Governance and Operating Model—The organization establishes governance and
operating structures in the pursuit of strategy and business objectives.
3. Defines Desired Organizational Behaviors—The organization defines the desired behaviors that
characterize the entity’s core values and attitudes toward risk.
4. Demonstrates Commitment to Integrity and Ethics—The organization demonstrates a commit-
ment to integrity and ethical values.
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5. Enforces Accountability—The organization holds individuals at all levels accountable for enterprise
risk management, and holds itself accountable for providing standards and guidance.
6. Attracts, Develops, and Retains Talented Individuals—The organization is committed to building
human capital in alignment with the strategy and business objectives.
7. Considers Risk and Business Context—The organization considers potential effects of business
context on risk profile.
8. Defines Risk Appetite—The organization defines risk appetite in the context of creating, preserving,
and realizing value.
9. Evaluates Alternative Strategies—The organization evaluates alternative strategies and impact on
risk profile.
10. Considers Risk while Establishing Business Objectives—The organization considers risk while
establishing the business objectives at various levels that align and support strategy.
11. Defines Acceptable Variation in Performance—The organization defines acceptable variation in
performance relating to strategy and business objectives.
12. Identifies Risk in Execution—The organization identifies risk in execution that impacts the achieve-
ment of business objectives.
13. Assesses Severity of Risk—The organization assesses the severity of risk.
14. Prioritizes Risks—The organization prioritizes risks as a basis for selecting responses to risks.
15. Identifies and Selects Risk Responses—The organization identifies and selects risk responses.
16. Assesses Risk in Execution—The organization assesses operating performance results and con-
siders risk.
17. Develops Portfolio View—The organization develops and evaluates a portfolio view of risk.
18. Uses Relevant Information—The organization uses information that supports enterprise risk
management.
19. Leverages Information Systems—The organization leverages the entity’s information systems to
support enterprise risk management.
20. Communicates Risk Information—The organization uses communication channels to support
enterprise risk management.
21. Reports on Risk, Culture, and Performance—The organization reports on risk, culture, and per-
formance at multiple levels of and across the entity.
22. Monitoring Substantial Change—The organization identifies and assesses internal and external
changes that may substantially impact strategy and business objectives.
23. Monitors Enterprise Risk Management—The organization monitors enterprise risk management
performance.