This is one of the eight Fundamental ERM practices. These practices are the foundations of a new ERM program.
Risk Language is not commonly recognized in most ERM literature as a fundamental practice. But all you need to do is to talk with a management team that has a common risk language and another who does not and it is difficult to see why it is not. The management with the common language can much more often articulate a common vision of risk management and especially of risk appetite. The objectives of the ERM program of a firm without a common risk language are usually not understood similarly by more than a tiny handful of people.
When hearing the story of ERM at a firm it seems to be a much more likely explanation for the firm without the common language that their ERM program exists mostly for the purpose of entertaining outsiders than for impacting the management of the firm.
At the earliest stage of development of an ERM program, the lack of a language should become apparent. Ask any two managers what they think is meant by an unacceptably large loss and you are likely to get as many different answers as you have answerers.
Ask that same set of people what would be an acceptable level of sales or profits and they will all usually be able to clearly state the company goals for the current year.
So the objective in this area as it is with measurement is to put risk on the same footing as sales and profits, to give it the same clarity and unanimity of understanding and purpose.
There are several steps to gaining a risk language for a firm.
- Existing Risk Terms – Making a collection of existing risk terminology used commonly in different parts of the company is a good first step. Notice where different parts of the company have different terms for one idea and other places where people have different meanings for the same term. Those conflicts need to be resolved so that there is one main set of terms used within the company for those ideas.
- Standard Risk terms – It is not necessary that each firm adopts an entire vocabulary about risk from outside the firm. But on the same token, there are a wide variety of standardized terms for risk. Take a look at Risk Glossary, for example. A good first step would be to take a short list of terms from a source like that and start to make sure that everyone starts to learn those terms.
- New Risk Terms – As ERM grows within the company, new terminology will develop for particular ideas. Some of that terminology will emanate from the risk department and some will come from the executives as they seek to repeat things that they hear at the risk committee meetings. For some time, everyone needs to be deliberate about the process of coining new terminology. Conscious that one way of saying something seems to “stick” better than another. Encourage the formation of this vocabulary.
Besides forming this new vocabulary, it is extremely important that both the risk staff and the other managers who are members of risk committees make sure to use the new risk terminology inn their everyday work. Language is naturally built by usage, not by dictionaries.
One last thought… ERM practice is a combination of some very expensive things and very simple things. In general, the largest firms can afford the very expensive things more easily while the simple things are usually executed much more effectively in small firms. This is one of the simple things.