Scribd Logo
Upload

Welcome to Scribd!

  • 4 views

    Enterprise Risk Management: January 2010

    Uploaded by

    Daniela Tunaru
    WorldFinancereprintofEnterpriseRiskManagement

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    Enterprise Risk Management: January 2010

    Uploaded by

    Daniela Tunaru
    4 views3 pages
    WorldFinancereprintofEnterpriseRiskManagement

    Original Title

    2010_WorldFinancereprintofEnterpriseRiskManagement

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    WorldFinancereprintofEnterpriseRiskManagement

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    4 views3 pages

    Enterprise Risk Management: January 2010

    Uploaded by

    Daniela Tunaru
    WorldFinancereprintofEnterpriseRiskManagement

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 3

    See discussions, stats, and author profiles for this publication at: https://www.researchgate.

    net/publication/273122247

    Enterprise Risk Management

    Chapter · January 2010

    CITATIONS READS
    5 453

    2 authors:

    Patrick L. Brockett Jing Ai


    University of Texas at Austin University of Hawaiʻi at Mānoa
    248 PUBLICATIONS   4,900 CITATIONS    29 PUBLICATIONS   215 CITATIONS   

    SEE PROFILE SEE PROFILE

    Some of the authors of this publication are also working on these related projects:

    Enterprise Risk Management View project

    Real Options View project

    All content following this page was uploaded by Patrick L. Brockett on 26 March 2020.

    The user has requested enhancement of the downloaded file.


    World Finance
    Enterprise Risk Management
    Dr Patrick L Brockett & Jing Ai | 08 Feb 2010

    Enterprise risk management (ERM) is a recent technique, practiced increasingly by large corporations
    in industries throughout the world. Sensible risk management flows from the recognition that a dollar
    spent on managing risk is a dollar cost to the firm, regardless of whether this risk arises in the finance
    arena or in the context of a physical calamity such as fire. ERM thus proposes that the firm addresses
    these risks in a unified manner, consistent with its strategic objectives and risk appetite.

    Most corporations adopt the definition of ERM proposed by the Committee of Sponsoring Organisations
    of the Treadway Commission (COSO) in their 2004 ERM framework. It intended to establish key
    concepts and techniques for ERM. In this framework, ERM is defined as “a process, affected by an
    entity’s board of directors, management and other personnel, applied in strategy setting and across
    the enterprise, designed to identify potential events that may affect the entity, and manage risk to be
    within its risk appetite, to provide reasonable assurance regarding the achievement of entity
    objectives”. This definition highlights that ERM reaches the highest level of the organisational structure
    and is directed by corporations’ business strategies. The concept of risk appetite is crucial. Risk
    appetite reflects a firm’s willingness and ability to take on risks in order to achieve its objectives.

    As a rising management discipline, ERM varies across industries and corporations. The insurance
    industry, financial institutions, and the energy industry are among the industry sectors where ERM has
    seen relatively advanced development in a broad range of corporations. Recently, even the public
    sector, are becoming aware of the potential value of ERM and risk managers are increasingly bringing
    it to top executives’ agendas.

    Notwithstanding the attractiveness of ERM conceptually, corporations are often challenged to put it
    into effect. One of the main challenges is to manage the totality of corporation risks as a portfolio in
    the operational decision process, rather than as individual silos, as is traditionally done.

    Operationalisation of ERM
    The core of the challenge lies in operationalising ERM. Integration of risks is not merely a procedure of
    stacking all risks together, but rather a procedure of fully recognising the interrelations among risks
    and prioritizing risks to create true economic value. Important components of this procedure include
    risk identification, risk measurement, risk aggregation/other modeling approaches, risk prioritisation,
    and risk communication.

    The four major categories of risks considered under an ERM framework are hazard risk, financial risk,
    operational risk, and strategic risk.

    Under ERM, the identification of individual risks in different categories should facilitate successive
    prioritisation and integration of risks to best achieve business objectives within the corporation’s risk
    appetite. Any event that may adversely affect the corporation’s achievement of its objectives is
    considered a risk under ERM. Proper objective identification is a prerequisite for risk identification. For
    example, business objectives can be described by certain key performance indicators (KPIs), which
    are usually financial measures such as ROE, operating income, earnings per share (EPS), and other
    metrics for specific industries, e.g., risk adjusted return on capital (RAROC) and risk-based capital
    (RBC) for financial and insurance industries. Risks are then recognised by means of these company
    performance metrics.

    Prioritisation
    To realise effective risk integration, ERM also promotes risk prioritisation. Risk prioritisation stems
    from the fact that risks are not equally important to corporations. Prioritisation should reflect different
    aspects of the company’s strategies and risk-management philosophy, e.g., cost to tolerate that risk,
    reduce it, elicit and apply management’s risk preferences, etc.

    ERM and compliance


    ERM at first arises from corporations’ efforts to comply with laws and regulations. To this end, it is
    seen more as an efficient internal control process. Within a corporation, it is often conducted with
    internal control functions and supervised by internal auditors. The most significant regulatory forces
    responsible for the rise of ERM are the Sarbanes Oxley Act of 2002, the Basel Capital Accord II, and
    rating criteria set forth by rating agencies such as Standard & Poor’s (S&P).

    ERM future – value creation


    ERM practices may have been initially driven by compliance needs, but developments should continue
    to serve as an internal control function for better corporate governance. One common objective for
    corporations is to maximise firm value. ERM provides a framework for corporations to consciously
    optimise risk/return relationships. This optimisation is achieved through the alignment of corporate
    strategic goals and risk appetite. At the operational level, the alignment guides virtually all activities
    conducted by the corporation. Specific risks are identified and measured. They are prioritised and
    integrated by recognising the interrelations and relative influences affecting different risky outcomes.
    Risk management strategies are developed for the entire portfolio of risks and their effects are
    assessed and communicated.

    Available at http://www.worldfinance.com/encyclopedia/article1054.html

    This article is an edited version of an entry in the “Encyclopedia of Quantitative Risk Analysis and
    Assessment”, Copyright © 2008 John Wiley & Sons Ltd. Used by permission.

    www.wiley.com

    View publication stats

    You might also like