Magazine article Risk Management

Emergence of the Chief Risk Officer

Magazine article Risk Management

Emergence of the Chief Risk Officer

Article excerpt

In today's global economy, implementing and managing a comprehensive risk management program is extraordinarily complex. Without effective management, the breadth and magnitude of the risks facing multinational organizations can easily threaten an organization's viability. To address this challenge, some organizations are adopting an integrated approach that embraces the totality of risk. An important strategic initiative resulting from this effort is the emergence of the chief risk officer, who is key to managing and monitoring enterprise risk.

Three trends are driving enterprises to adopt an integrated approach to risk management: * Broader dimensions of risk -- Risk is far more complicated today because of globalization, advancing technology and the greater interdependency of risks. Multinationals face myriad risks, including political, foreign exchange, counterparty and terrorist exposures. Globalization has forced organizations to become far more competitive in all aspects of their business, from capital formation to risk assessment and treatment.

Advanced information processing technology has also changed the nature of risk. The ability to disseminate information widely and instantaneously has created 24-hour virtual marketplaces, particularly in the financial markets. Similarly, computer models have accelerated the development of complex financial instruments like derivatives, whose value is derived from some underlying index -- interest rates, currencies, commodity prices and others. Although derivatives are essential tools for managing risk, their misuse can threaten the viability of an enterprise. Well-publicized trading losses affecting Orange County, Barings Bank and Metallgesellschaft are three examples that reinforce the need for effective risk management and internal controls.

Finally, risks facing an organization are not necessarily independent. Consider, for example, companies revising computer date programming to accommodate the year 2000: An organization may be date-compliant; however, if its business partners' or vendors' systems are not, the organization will face significant problems that may affect its bottom line negatively.

* Changing role of risk management -- as risk management evolves, two camps have emerged. One advocates offensive risk management while the other emphasizes defensive risk management. The latter, more traditional approach focuses on minimizing the cost of risk, largely through loss control and internal compliance. Offensive risk management, the more strategic solution, attempts to leverage risk to determine if there is an opportunity to increase shareholder value. For example, many organizations have formed captive insurers to fund risk. In most instances, the captive's success has largely been measured by economic efficiencies and cost stabilization. While these results are to be commended, few organizations have promoted the use of captives to help drive profitability, such as by providing product warranties and credit guarantees. By practicing offensive risk management, organizations are finding innovative ways to manage their insurance programs with more positive effects on the bottom line than would be possible by simply striving to minimize the overall cost of risk.

* Regulatory oversight -- Corporate governance, particularly with a stronger emphasis on risk control, has emerged as a priority for senior management. For example, the work of the Committee of Sponsoring Organizations (COSO) of the Treadway Commission has evolved into a well-accepted standard for how U.S. public companies manage and control risk. COSO's internal control process attempts to meet several fundamental objectives -- reliability of financial disclosure, compliance with laws and effectiveness of operations.

To meet these goals, an organization must also implement several interrelated initiatives. First, management must establish an environment that champions risk control (rather than hinders its use). …

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