Every business aims at achieving its objectives, which are aligned to higher sales and revenue. The strategy to attain a wider market share engages several risks, which manifest in the course of business. Enterprise risk management (ERM) provides the ability to the management to handle all risks associated with the business objectives. The implementation of ERM is an involving process as it requires the combination of strong executive management, organizational consensus, and other program sensitivities. The company analyzed in this paper is the American Tower Corporation (ATC), which manifests several challenges within its ERM framework, including assessing ERM value, decision-making, and risk assessment method.
The suitability of Current-state ERM framework
ATC faces challenges in assessing ERM’s value, which affects its decision-making process and implementation. Despite recording high sales in the 2019 financial year, ATC still uses the traditional strategy of assessing risk, which includes ROE, Return on Equity, RAROC, Risk-adjusted return on capital, and ROA, Return on Assets (Moody, 2011). These traditional techniques of assessing risk value are outdated and do not cover all the dynamics of the risks existing today. Another challenge with ATC’s framework is the time horizon. The time horizon involves the company’s intention to invest and incorporate ERM into its business strategies. The case study shows some of the ATC’s strategies have failed to address the business risks. As a key facet of the organization, ATC’s inclusion of the time horizon should be part of its organizational culture as it promotes proper planning and decision-making process.
ATC’s current ERM framework does not capture the aspect of risk reporting within the company. Risk reporting involves the analysis of what information should be shared with its constituents and how the risk should be communicated. Effective communication, especially on the risk management aspects, is key as it promotes the ability of the management to work with the risk assessment team, hence becoming more discrete about the ways of mitigating risks.
Future-State ERM Framework
ATC may handle the issue of risk valuation by integrating the traditional risk asset techniques with an improved risk score. To achieve this strategy, ATC may focus on four key categories, which are the shareholder value-added, the avoided risk, the hard dollar savings, and the qualitative benefits (Moody, 2011). The shareholder value added includes the company’s equity premium, together with the public’s perception. The avoided risk includes options such as insurance products or hedging. The hard dollar savings involve the process of consolidating funds to reduce the high risks involved in regulatory capital requirements.
ATC can establish risk packages that have varying needs and accountabilities to enhance risk-return management. The risk packages created should be assigned to the management team, business unit leaders, and audit committee to oversee the risks, and determine which set of risk exceed a certain threshold put by the team. By having an oversight team managing the risk, the identification of risks may be conducted in advance, hence developing better mitigation strategies.
A gap analysis
A key aspect of shifting from a current-state ERM framework to the desired future-state is risk compliance. Today, most companies fail to comply with enterprise risk management measures, which help companies minimize their risks. ATC may bridge its gap by becoming compliant to risk valuation measures, assessment methods, and work as an inclusive team to help in the decision-making process.
Moody, M. J. (2011). Rating Agencies’ Impact on Enterprise Risk Management. Enterprise Risk Management, 465-478. https://doi.org/10.1002/9781118267080.ch25