Magazine article Risk Management

The Way Forward: Rethinking Enterprise Risk Management

Magazine article Risk Management

The Way Forward: Rethinking Enterprise Risk Management

Article excerpt

These are extraordinary times, especially for risk managers. And that is saying something indeed when one considers how the last decade has been marked by a succession of disasters that have all thrust the discipline of risk management into the spotlight.

By 1998, the dot-com bust was in full swing, displaying a magnitude of market risk that few risk managers had cause to contemplate before overheated business models deflated in record numbers.

In 2000, the Y2K bug created a level of IT risk so great that it consumed billions of dollars in loss prevention.

A year later, 9/11 redefined the scope of terrorism risk. The accounting scandals that destroyed Enron, WorldCom and Arthur Andersen in 2001 paved the way for Sarbanes-Oxley in 2002 and made corporate transparency a new watchword.

In 2003, SARS sharply raised awareness in pandemic risk, especially as avian flu was pegged as the next likely global epidemic. That summer, a massive blackout in the northeastern United States and southeastern Canada displayed the serious contingent business interruption risk posed by aging infrastructure. In Italy, Parmalat's massive accounting scandal later became "Europe's Enron."

In 2004, the Indian Ocean earthquake killed nearly 225,000 in 11 different countries, raising awareness of the catastrophic potential of tsunamis and natural disasters in general.

In 2005, this awareness reached a new level with the most catastrophic hurricane season on record. Some 28 storms, including a record-breaking 15 hurricanes, pummeled the shores of North America, with Hurricanes Katrina, Rita and Wilma causing unprecedented damage and making disaster preparedness and business continuity all top-level business concerns.

In 2008, extensive product liability issues surfaced concerning a string of Chinese product recalls, while the effects of the subprime lending crisis became too large to ignore, presaging the ongoing credit crisis--the worst financial disaster the world has seen since the Great Depression.

In each of these events, an element of risk management was brought to the fore in ways that forced executives to realize that these were hazards that needed to be managed. Risk managers were ideally suited to address such problems, and for many who had long toiled in obscurity, each fresh disaster provided a new chance for them to shine. In a grim way, the last 10 years have been very good for risk managers--even if they have been bad for just about everyone else on the planet.

Yet all of these aforementioned disasters, even when combined, do not carry the global magnitude of the current financial crisis, especially in terms of failed risk management. The cause of the credit crisis is fairly easy to summarize: unfettered greed promoted the sale of mortgages to unworthy buyers from an industry that simply stopped practicing any meaningful due diligence on the risks it was buying and selling, thereby creating a line of financial dominoes that led from Main Street to Wall Street and back again. And when the dominoes fell, everyone lost.

With every other risk management disaster of the past decade, the effects were ultimately localized by geography or industry. The credit crisis is the first truly universal risk management disaster, and it calls into question both the current state of the discipline and its future.

The State of Risk Management

Back in the 1970s, there was a remarkable transformation of the risk management discipline as insurance buyers elevated themselves into risk managers responsible for, and capable of, handling a wide range of business challenges that often could not be addressed with insurance coverage alone. Risk managers had to learn the decision-making processes and how organizations gauge, analyze and manage their risks. It was a sea change not just for the discipline but for how companies looked at the very concept of risk. …

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