As the oversight role of the corporate board in Enterprise Risk Management (ERM) expands, companies feel the need to fill a knowledge gap on effective risk governance practices, according to a major new study recently released by The Conference Board.
"The concept of correlating risk management and strategy in an enterprise-wide structure first appeared in the midst of merger frenzy in the late 1980s," says Dr. Matteo Tonello, a corporate governance expert at The Conference Board and author of the study. "At the time, many executives and strategists acknowledged that the enormous amount of risk undertaken through a series of corporate combinations was often not justified by a sound analysis of long-term prospects. In the 1990s, the debate continued and increasingly drew the attention of the business community, only to be obfuscated by the more exclusive focus on financial risks resulting from the scandals of the Enron era. A few years into the implementation of the Sarbanes-Oxley Act of 2002, corporations are now ready to leverage their experience with mandatory internal control procedures to establish a more comprehensive ERM infrastructure."
In response to the need for guidance in the design and implementation of ERM, The Conference Board instituted a case-study based Research Working Group on Enterprise Risk Management with select risk and governance officers. Emerging Governance Practices in Enterprise Risk Management presents an overview of this group's findings, including comments from participants and insights gleaned from five case studies of companies at the forefront of ERM. The report also provides a detailed "road map," with a discussion of the oversight role of the corporate board in each of the major stages of ERM development and execution.
An Integrated Approach to Governance and Risk Management
The group operates from the recognition that, after years of regulations focused on tackling fraudulent behaviors and raising compliance standards, a new era in corporate governance development has begun. Public companies have started to realize that poor governance can hurt market opinion, with a negative impact on the cost of capital and share price. For this reason, management and corporate boards need to proactively think about the specific governance issues their companies are facing and set up a process to anticipate and respond to major risks in this arena.
"As soon as business organizations abandon the traditional view of corporate governance as a regulatory burden," says Dr. Tonello, "they can begin to more easily understand its value as a fundamental risk management activity. That is why our research group reinforced the oversight role of the board and stressed the importance of integrating corporate governance practices with a company's Enterprise Risk Management program."
The report points to the benefits of this integration, which:
* Reduces the inefficiencies inherent in the more traditional, segmented approach to risk management and promotes cost reductions through the development of synergies among business units and departments (both through the aggregation of risks for more accurate quantification and the adoption of coherent risk response strategies).
* Minimizes costly risk exposures, by allowing the company to identify interdependencies among risks that would remain unnoticed under the traditional risk management model.
* Provides-through its emphasis on overall risk appetite-a more objective basis for resource allocation, therefore improving capital efficiency and return on equity.
* Stabilizes earnings and reduces stock-price volatility. Empirical evidence, especially in the insurance industry, supports the use of hedging techniques to reduce unanticipated earnings fluctuations; further studies highlight the need to coordinate hedging activities among functional or business silos in order to optimize the benefits.
* Offers the tools to make more profitable, risk-adjusted investment decisions. …