On The Top of My List

I finished a two hour presentation on how to get started with ERM and was asked what were my top 3 things to keep in mind and top 3 things to avoid.

Here’s what I wish I had said:

Top three hings to keep in mind when starting an ERM Program:

  1. ERM must have a clear objective to be successful.  That objective should reflect both the view of management and the board about the amount of risk in the current environment as well as the direction that the company is headed in terms of the future target of risk as compared to capacity.  And finally, the objective for ERM must be compatible with the other objectives of the firm.  It must be reasonably possible to accomplish both the ERM objective and the growth and profit objectives of the firm at the same time.
  2. ERM must have someone who is committed to accomplishing the objective of ERM for the firm.  That person also must have the authority within the firm to resolve most conflicts between the ERM development process and the other objectives of the firm. And they must have access to the CEO to be able to resolve any conflicts that they do not have the authority to resolve personally.
  3. Exactly what you do first is much less important than the fact that you start doing something to develop an ERM program.   Doing something that involves actually managing risk and reporting the activity is a better choice than a long term developmental project.  It is not optimal for the firm to commit to ERM, to identify resources for that process and then to have those people and ERM disappear from  sight for a year or more to develop the ERM system.  Much better to start giving everyone in management of the firm some ideas of what ERM looks and feels like.  Recognize that one product that you are building is confidence in ERM.

Things to Avoid:

  1. Valuing ERM retrospectively taking into account only experienced gains and losses.  (see ERM Value)  A good ERM program changes the likelihood of losses, but in any short period of time actual losses are a matter of chance.  On the other hand, if your ERM programs works to a limit for losses from an individual transaction, then it IS a failure if the firm has losses above that amount for individual transactions.
  2. Starting out on ERM development with the idea that ERM is only correct if it validates existing company decisions.  New risk evaluation systems will almost always find one or more major decisions that expose the company to too much risk in some way. At least they will if the evaluation system is Comprehensive.
  3. Letting ERM routines substitute for critical judgment.  Some of the economic carnage of the Global Financial Crisis was perpetuated by firms where their actions were supported by risk management systems that told them that everything was ok.  But Risk managers need to be humble.

But in fact, I did get some of these out. So next time, I will be prepared.

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Explore posts in the same categories: Action, Black Swan, Enterprise Risk Management, Execution Risk, Financial Crisis, risk assessment, Risk Management System

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