Fundamentals of Enterprise Risk Management: How Top Companies Assess Risk, Manage Exposures, and Seize Opportunities

By John J. Hampton | Go to book overview

CHAPTER 16
HORIZON RISK

RISK QUOTE: It doesn’t matter if a cat is black or white, so long
as it catches mice
.

—DENG XIAOPING, CHINESE REVOLUTIONARY,
POLITICIAN, AND REFORMER

RISK QUOTE: Greed, for lack of a better word, is good. Greed is
right, greed works. Greed clarifies, cuts through, and captures
the essence of the evolutionary spirit
.

—GORDON GEKKO, IN WALL STREET(1987)

The final risk category that crosses organizational boundaries, horizon risk, is, all too often, ignored. Horizon risk is an external exposure that arises when the organization is not actively scanning its external environment for developments and changing trends that could affect business and operations. With a global knowledge economy and increasingly complex structures for conducting business, scanning the horizon has become an increasingly important role of a central risk function.

In an ERM framework, we should investigate the mechanisms that are used to ensure an effective program of scanning outside the entity, identifying latent exposures, and communicating them to interested managers. The scanning should focus on risk factors that could threaten the alignment of goals and strategies. Three broad goals of the scanning process are:

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