Introduction to a SERM System

We will explore the business case for sustainability and the benefits from ensuring that a Sustainable Enterprise Risk Management (SERM) system leads you towards becoming a sustainable organisation. There are benefits to be derived from proactively seeking opportunities for new markets in a world of increasingly constrained resource supplies and increasing demands. The approach seeks to minimise the risks, the negative aspects of not yet being sustainable. In so doing it should be understood that an enlightened view of the risk environment can:

  • Reduce overheads and material costs;

  • Increase compliance;

  • Reduce fines and penalties; and

  • Improve competitiveness and marketing opportunities.

Outstanding economic, environmental, social health and safety and governmental performance can have practical benefits for the organisation. Actions to mitigate risk can include the taking of opportunities as they present themselves. Companies like BT, General Electric and Wal-Mart are changing their competitive game by taking sustainability risk factors and turning these into benefits for their competitive strategy.

There is some debate regarding whether the modus operandi of business is anything other than business. To support the view that sustainability issues are crucial to business operations, a survey conducted by the Center for Corporate Citizenship & Sustainability (http://www.bcccc.net/index.cfm) of 198 medium to large multinational companies found that:

  • A total of 90% of participating companies say their company's approach to corporate citizenship and sustainability issues reflects at least some belief in the potential rewards;

  • Two-thirds of survey participants say that corporate citizenship and sustainability issues are of growing importance for their businesses; and

  • A majority of big companies concerned with corporate responsibility issues acknowledge that they lack an active strategy to develop new business opportunities based on those concerns.

An emerging example of the new mode of operations and how values-led brands are helping to create value is a recent quote from Unilever's CEO Patrick Cescau:

For us, social responsibility is about creating social benefits through our brands and through our interactions as a business with society. It's the business of doing business responsibly . The business case for corporate responsibility can be summarised in four ways: sustainable development, building reputation, growing markets, and fuelling innovation. (Business as an Agent of World Benefit Forum in Cleveland, USA, 24 October 2006 )

The SERM framework seeks to highlight that there is a broader definition of business risk which covers a wider range of current and emerging risks that can impact upon an organisation. Quite often these risks affect intangible assets and value as opposed to the more tangible damage we are used to as risk managers. Many of the triggers can originate from outside the organisation, yet still require management. So we offer the following version of what we perceive to be risk as,

anything which prevents an organisation from achieving its business objectives.

To demonstrate this wider definition of business risk we quantify other loss experiences of companies, many of whom were unprepared and did not view them as risks as they were outside their traditional view of what was business and business risk. In this book we use research supplied by the SERM Rating Agency Ltd who have analysed a wide range of companies' loss episodes, which can be quantified as having had an economic impact, including:

  • Non-compliance fines and enforcement notices;

  • Reputation and brand damage;

  • Work stoppages, labour disputes and strikes; and

  • Product recalls and loss of stakeholder confidence.

The methodology has been tested and refined over 10 years, originally developed in partnership with: the insurance industry, the United Nations Environment Programme (UNEP), the Association of Chartered Certified Accountants (ACCA), the Association of British Insurers (ABI) and the Centre for the Study of Financial Innovation (CSFI), among many others. It can be used to access any size of organisation.

A key element of a SERM system is the concept of 'sustainability' or sustainable development as it is also known; sustainable development is one of the guiding philosophies behind our investigating the potential of a Sustainable ERM (SERM) system. The term is generally traced back to the World Commission on Environment and Development (the Brundtland Commission) report which coined the following definition: 'Sustainable Development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs'.

Sustainable development reporting can help companies to mitigate risk, protect their corporate brands, and gain competitive advantage. (World Business Council for Sustainable Development)

A more current corporate version offered by Lord John Browne, Group Chief Executive of BP in a speech on sustainability, notes:

Our purpose is to supply the goods and services which people want to buy at a cost they can afford. If a business can't meet the needs of its customers it will cease to trade . The business of business is business and sustainability is about achieving enduring commercial success. (6th Annual Peter M. Wege Lecture, University of Michigan, Flint, USA, 14 November 2006)

The need to find new frameworks like a Sustainable Enterprise Risk Management system has been emphasised by Richard Evans, President and Chief Executive Officer of Alcan Inc.:

Sustainability requires new approaches, innovative solutions and stronger partnerships. All of those, when executed and managed well, build value . Sustainability is not a challenge. It is a path - I would argue the only path - to a successful future. (The 2006 Banff Forum, in Mont-Tremblant, Canada, 6 October 2006)

The risk management system also sits well with the frameworks within corporate social responsibility (CSR) frameworks (also known as corporate responsibility (CR), corporate accountability (CA) and corporate citizenship (CS)), which follow a sustainable development style framework, as this quote on the definition of CSR demonstrates:

A company's commitment to operating in an economically, socially and environmentally sustainable manner, while recognising the interests of its stakeholders, including investors, customers, employees, business partners, local communities, the environment and society at large. (Canadian Business for Social Responsibility)

Ensuring business legitimacy and licence to operate are the overreaching aims of the wider business community. To ensure this, there are concepts of: non-financial performance measurement; corporate social responsibility (CSR) also known as corporate responsibility and corporate accountability; sustainability; and business durability. Some prominent business organisations are also promoting these concepts. The Confederation of British Industry (CBI) has proclaimed:

It is a prime responsibility of managements to ensure that companies are good corporate citizens, caring not just for those with a direct stake in business -- shareholders, employees, customers, suppliers -- but for the general public and the environment, in the broadest sense of the term. Social responsibility encompasses many different aspects of business life. It means putting customers first, and providing them with good, safe and reliable products and services. It means being a first class employer, providing fair pay, good conditions and decent pensions for employees. It involves genuine concern for health and safety, and a commitment to good employee involvement and communications.