Your company is operating normally — but do you need to understand enterprise risk management? The answer is yes.
Compared to domestic enterprises, Foreign Direct Investment (FDI) companies face greater challenges, ranging from legal and regulatory changes to market volatility. Therefore, establishing an effective enterprise risk management (ERM) system for FDI businesses is crucial, especially one that aligns with both international standards and local practicalities. In this article, KMC will clarify what enterprise risk management entails and outline the key steps to build an efficient ERM framework.
What is Enterprise Risk Management?
First, risk refers to the possibility of undesirable events occurring that may cause damage or negatively impact business operations, such as financial losses or production disruptions.
Enterprise risk management (ERM) is the proactive process by which a company identifies, assesses, and controls these risks. The objective is to minimize adverse impacts while leveraging potential opportunities to ensure stable business operations.
ERM is not solely the responsibility of an individual; it requires close collaboration across departments. Therefore, leadership must inspire and foster alignment from top to bottom, helping all employees understand that risk management is not just the duty of a single team but a shared responsibility of everyone.
For example, executives can actively participate in discussions and clearly communicate the risk management vision so employees recognize its importance and engage proactively.
Moreover, senior management must lead by example, encouraging employees to openly voice their risk concerns without fear of judgment. Effective risk management only occurs when everyone feels safe to share their perspectives. This enables the enterprise to timely detect and address risks.
Why Do FDI Enterprises Need a Professional Enterprise Risk Management System?
FDI enterprises operating in the Vietnamese market often face unique challenges such as a new business environment, cultural differences, and market volatility. Therefore, a professional enterprise risk management (ERM) system is not only a “shield” for protection but also a “compass” guiding sustainable development for FDI companies. Here are the key reasons:
- First, accurate data from the ERM system enables FDI enterprises to detect potential issues early, such as crisis risks. This allows timely preparation of contingency plans to minimize losses and maintain corporate reputation.
- Additionally, the system enhances business operation efficiency. Instead of relying on intuition, factual data helps companies develop clear strategies, optimize resources, and make swift decisions. This is especially critical for FDI enterprises needing rapid adaptation to the Vietnamese market.
- Finally, risk management is not just defensive but also opens up numerous opportunities. Through data analysis, enterprises can identify potential opportunities like market expansion or product improvement. This creates competitive advantages and enables more efficient use of investment capital.
Enterprise Risk Management Process Steps
· Establish Objectives
What do you aim to achieve through risk management? Consider market trends to anticipate potential risks such as exchange rate fluctuations or policy changes. Then, set specific short-term goals like immediate cost reduction, or long-term objectives such as building a sustainable strategy.
· Risk Identification
When identifying risks, examine threats from both internal and external sources, including corporate culture and market risks. To avoid overlooking any risks, use checklists or conduct interviews with employees and partners to thoroughly detect risk sources (assets, human resources).
· Risk analysis and assessment
Evaluate which risks are most likely to occur and their potential consequences. Then, compare the severity and frequency to prioritize the most critical risks that require prompt attention.
· Risk Treatment
Depending on the situation, enterprises may choose to:
- Avoid risk by not participating in high-risk projects, even if it means missing out on potential profits.
- Mitigate losses by improving processes.
- Transfer risk by purchasing insurance or partnering with third parties.
- Share risks and opportunities through joint ventures. For example, according to feedback from 1,540 FDI enterprises participating in the 2012 PCI-FDI survey, nearly 50% of investors opted for risk mitigation strategies via joint ventures with local companies.
- Accept minor risks when the benefits outweigh the potential downsides.
Continuously monitor the situation and assess the effectiveness of implemented risk responses to address new emerging risks. Ongoing updates ensure the ERM process remains flexible and aligned with actual business conditions.
An enterprise risk management system not only helps you overcome immediate challenges but also supports your long-term strategic goals. If you recognize the importance of risk and are seeking professional enterprise risk assessment services, consider KMC. We provide comprehensive consulting on internal control systems and deliver risk awareness training for all employees.
