ERM: Leveraging Risk as a Strategic Resource

Hirotomo Abe
Professor, NUCB Business School

In his seminal 1921 work Risk, Uncertainty and Profit, economist Frank H. Knight argued that entrepreneurs earn profits by bearing uncertainty. Without a sound understanding of risk and a willingness to embrace true uncertainty, he contended, companies cannot achieve sustainable growth or competitive advantage.

Japanese firms, as noted by Professor Mikiharu Noma of Hitotsubashi University, tend to be risk-averse. This tendency is reflected in their conservative investment behavior and the excessive accumulation of internal reserves. Cultural preferences for stability and harmony, low tolerance for failure, rigid governance structures, and slow decision-making processes all contribute to a reluctance to take risks.

Until recently, many Japanese companies have approached risk management primarily as a compliance or internal control mechanism. However, these systems often remain disconnected from corporate strategy. As a result, Enterprise Risk Management (ERM) has yet to function as a true decision-making framework in the majority of Japanese corporations.

“ERM—Integrating with Strategy and Performance” (Committee of Sponsoring Organizations of the Treadway Commission: COSO, 2017) marks a significant shift in perspective. It redefines ERM not merely as a risk mitigation tool, but as a strategic enabler. By emphasizing the concept of “risk in the pursuit of value,” the framework encourages organizations to integrate risk considerations into strategy formulation, enabling more resilient and realistic planning.

ERM is designed to help organizations create, preserve, and realize value. It is not just a system, but a mindset—one that should be embedded in daily operations across all levels of the organization. Its foundation lies in leadership’s commitment to risk awareness and the cultivation of a shared risk culture. COSO ERM highlights “governance and culture” as a core component, underscoring the importance of a common language and shared values around risk.

While regulated sectors such as banking and insurance in Japan have adopted ERM practices, broader implementation remains limited. In a world where perfect foresight is impossible, the ability to understand and integrate risk into decision-making is essential for resilience and long-term success. For future business leaders, COSO ERM offers a practical and forward-looking framework for navigating uncertainty with clarity and purpose.

Reference

John R.S Fraser, Rod Quail and Betty Simkins (Eds.), Enterprise Risk Management Today’s Leading Research and Best Practice for Tomorrow’s Executives (Willey, 2021)
Mikiharu Noma, Retirement Benefit Obligations and Corporate Behavior: An Empirical Analysis of Internal Liabilities (Chuokeizaisha, 2020)