System Safety

by Sandie Donelson, April 2015

1500 words

5 pages

essay

As a risk management strategy, system safety utilizes system-based approach to identify and analyse potential hazards as well as apply potential control strategies designed to mitigate potential danger. Recent economic crisis with its magnitude brought risk management at the enterprise level to the forefront among government regulators and managers. Systemic approach to enterprise risk management allows companies to benefit greatly from aligning separate processes designed to prevent hazardous events into a well-balanced network. This paper is dedicated to enterprise risk management as a safety process that can assist companies in identifying risks and manage them, and potential benefits that it is likely to yield to an enterprise in both turbulent markets and during economic revival.

To introduce the concept of enterprise risk management (ERM), it is important to distinguish between traditional approaches to risk management in business and ERM as a systemic paradigm. Traditionally, risk management in an organization relied upon the assumption that separate units of the organization were exposed to different types of risks that had to be handled separately (Subhani & Osman, 2011). For example, organizations distinguished between financial, operational and strategic risks and developed separate approaches for identifying them and preventing them. Thus, risk management in an organization was traditionally compartmentalized and uncoordinated (McShane et al., 2011). For example, financial risk management relied heavily on models proposed by Sharpe (1964), Markovitz (1952) as well as various applications of capital asset pricing model (CAPM). However, a higher-level approach calls for addressing risks at the enterprise level, envisioning a business as a system, not just passing risk management to a specialized department (Statzer, 1999).

Unlike traditional risk management approach, the goal of ERM is “coordinated management of all risks faced by a firm, whether it is risk related to corporate governance, auditing, supply chains, distribution systems, IT, or human resources” (McShane et al., 2011). The goal of ERM therefore is to obtain a systematic understanding of the correlations between risks. ERM takes into account all risks that are faced by an organization through organizing them into a portfolio. Another explanation of ERM, provided by Subhani & Osman (2011) suggests that ERM is “a method and practice as result by the organization’s officials and other personnel, to apply certain strategies and settings across the enterprise, to seek and identify potential events that may affect a certain article/body of the enterprise in a uneven way, as an obstruction to the enterprise”. Fundamentally, ERM aggregates risks and hedges the residual, which is likely to be more efficient than dealing with each risk independently. Coordination and strategic allocation of risk concept suggests that the goal of risk management under this paradigm is to allocate risks in such a way that they align to the company’s strengths. In other words, a well-designed ERM strategy may, in fact, lead to an overall increase in total risk faced by an organization. As explained by McShane et al. (2011), companies should design their ERM strategies in such a way that exposure to risks in areas where companies have …

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