Magazine article Risk Management

Surviving the Age of Risk: A Call for Ethical Risk Management

Magazine article Risk Management

Surviving the Age of Risk: A Call for Ethical Risk Management

Article excerpt

We live in uncertain, yet exhilarating times, when our professional landscape is ever-changing, and the pace of change is nothing short of remarkable. This has brought the importance of the management of risk into the public spotlight and given birth to what one of the authors, in his 2003 installation address to the Risk and Insurance Management Society (RIMS), termed the "Age of Risk." This article proposes to be a survival guide to the Age of Risk as well as a call for our community to be proactive in making this a Golden Age in the history of the business world. The authors suggest that long-term survival in the Age of Risk requires a self-prescribed overhaul of how the members of the risk management community view themselves and their role in the corporate community. As we venture further into the new millennium, it is apparent that the world of risk management, as seen in the 20th century, has been overtaken by a new world order of viewing risk, often touted in the press as enterprise risk management (ERM). Although the implementation of ERM has been a varying experience for different industries, its basic underlying tenets have become commonplace discussion topics in risk departments throughout the corporate sector.

What has also become apparent is that stakeholders, including but certainly not limited to shareholders, will not stand for the atrocities of corporate management as has been displayed by the Enrons, WorldComs, Arthur Andersens and Parmalats of the world. This has led to a renewed and vibrant interest in the field of corporate governance in the United States, as seen by the passage of the Sarbanes-Oxley Act (SOX). Although corporate governance had been a mainstay in the mindsets in international firms, the SOX response has set the standard for the future of guidelines. This calls for a level of integrity to be displayed by firms that has not been seen in the past.

The irony of these two separate occurrences is also the opportunity that presents itself to our industry as the current face of risk management. This is a concept that we have dubbed ethical risk management (EthRM). This is the next natural evolutionary advancement from ERM. Just as ERM seeks to simultaneously consider all firm risks (regardless of source) as a portfolio of the risks facing a firm, EthRM considers all of the stakeholders of a firm as a single portfolio of interested parties. Consideration of these varied groups as a single entity forces the firm to consider all stakeholders when managing all firm risks. Admittedly, this task is daunting and cumbersome. However, is there a better time than now to start making these changes? And who better to take a leadership role than the risk management community.

Consider that now more than ever, senior management is personally concerned with the implications of weak or even deficient risk management. Furthermore, as many firms are realizing the importance of reputational risk management to their bottom line, the costs of being perceived as an industry laggard could be extreme. EthRM creates a benchmark that all firms must strive to meet if not exceed. So the real question is how are we able to create ethical risk management within the corporation?

The Six C's of Ethical Risk Management

In order to make EthRM a reality, one must realize that there are some required components to effect these changes within the corporation. We've termed these requirements as the six C's of ethical risk management. They are: champions, commitment, consistency, correlations, communication, and a code of ethics.

Champions. The first step towards achieving EthRM is to find someone to champion this way of thinking for the rest of the company. One may believe it is the risk management professional who will be the champion, and while for certain entities this may have merit, a senior executive or member of the board must become the champion of the EthRM cause. …

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