RISK MANAGEMENT: THE CASE FOR AN ENTERPRISE WIDE APPROACH
Enterprise Risk Management is a relatively new term that is quickly becoming viewed as the ultimate approach to risk management. Since the mid-1990s, enterprise risk management has emerged as a concept and as a management function within corporation.(Geneva) Enterprise-wide risk management looks within and across business lines and activities of the organization as a whole to consider how one area of the firm may affect the risks of other business lines and the enterprise as a whole. This approach is in marked contrast with the silo approach to risk management, which considers the risks of activities or business lines in ...view middle of the document...
On the other side, Risk management refers to the overall process that a financial institution follows to define a business strategy, to identify the risks to which it is exposed, to quantify those risks, and to understand and control the nature of the risks it faces. According to FRBNY review “enterprise risk management involves not only an attempt to quantify risk across a diversified firm, but also a much broader process of business decision making and of support to management in order to make informed decisions about the extent of risk taken both individual lines and by the firm as a whole.”
However, no enterprise operates in a risk free environment, and even enterprise risk management does not create such an environment. Rather, enterprise risk management enables management to operate more effectively in environments filled with risks. According to KPMG 2001 report “enterprise risk management provides enhanced capability to:
· Align risk appetite and strategy
· Link growth, risk and return
· Enhance risk response and decisions
· Minimize operational surprises and losses
· Identify and manage cross-enterprise risks
· Provide integrated responses to multiple risks
· Seize opportunities
· Rationalize capital
So enterprise risk management helps an organization to achieve its performance and profitability targets and prevent loss of resources. And it helps an organization to ensure that it complies with law and regulations, effective reporting and avoiding damage to its reputation and other consequences. All together it help an entity get to where it wants to go and avoid pitfalls and surprises along the way. ( Steinberg and Averson)
Moreover, one of the main reason why the risk management has received as much on going attention is that corporate disasters seems to occur on a regular basis to remind us of the perils of “not getting it right”. (Lam J ,Erisk 2001) These can be related to natural catastrophes, accidents, human error or fraud and traditionally companies have been able to transfer such kind of risk to insurance companies. (Geneva) But few years ago, risk management problems led to the collapse of baring, kidder and confederation life, as well as huge losses related to derivatives trading at other companies. So as a result of these wake-up calls and internal risk reviews, leading companies now using enterprise wide risk management approach or overall risk management approach to business risks instead of traditional approach of risk management.
As risk management help to improve bottom line positions by cost reduction and improving the likelihood of overall business success and other side speculative risk management failures such as Baring, Piper alpha and the sea Empress disaster grab headlines but many organizations suffer large cumulative losses from myriad of lesser incidents. According to Waring and Glendon (2002) objectives of risk management may be summarized as eliminating, reducing and controlling pure risk...