Second Step to a New ERM Program

Everyone knows the first step – Identify your risks.

But what should you do SECOND?  The list of ERM practices is long.  Riskviews uses an eight item list of ERM Fundamentals to point the way to early ERM developments.

And you want to make sure that you avoid Brick Walls and Touring Bikes.

But the Second Step is not a practice of ERM.  The Second Step is to identify the motivation for risk management.  As mentioned in another post, there are three main motivations:  Compliance, Capital Adequacy and Decision making.

If Compliance is the motivation, then the ERM development process will be to obtain or develop a checklist of items that must be completed to achieve compliance and to work to put something in place for each of those items that will create the ability to check off that item.

If Capital Adequacy is the motivation, then building an Economic Capital model is the main task that is needed for ERM development.

If Decision making is the motivation, then the process becomes somewhat more involved.  Start with identifying the risk attitude of the firm.  Knowing the risk attitude of the firm, the risk management strategy can then be selected.  Each of the ERM Fundamentals can then be implemented in a way that is adapted to the risk strategy.

This process has been described in the post Risk Attitudes and the New ERM Program.

But knowing the motivation is key.  A newly appointed risk management officer might have fallen in love with literature describing the Risk Steering strategy of ERM.  They would set up a big budget for capital modeling and start to set up risk committees and write rules and policy statements…..

And then hit a brick wall.

That is because they did not clearly identify the motivation for their appointment to be the risk management officer.  The term ERM actually means something totally different to different folks.  Usually one of the three motivations:  Compliance, Capital Adequacy, or Decision Making.

A company that is primarily motivated by Capital Adequacy will have minimal interest in any of the active parts of the ERM practices.  A company motivated by compliance will want to know that each and every step in their ERM process satisfies a requirement.  Talking about enhanced decision making as the reason for steps in the ERM development process will either confuse or even anger management of these companies.

The reaction to a mismatch of ERM program to motivation is similar to someone who booked a cruise for their vacation and found themselves on a cross country biking tour.

Most modern cruise ships feature the following facilities:

  • Casino – Only open when the ship is in open sea
  • Spa
  • Fitness center
  • Shops – Only open when ship is in open sea
  • Library
  • Theatre with Broadway style shows
  • Cinema
  • Indoor and/or outdoor swimming pool
  • Hot tub
  • Buffet restaurant
  • Lounges
  • Gym
  • Clubs

Keep that contrast in mind when you are making your plans for a new ERM system.

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Explore posts in the same categories: Compliance, Cultural Theory of Risk, Economic Capital, Enterprise Risk Management, ERM, Risk Culture, Risk Management System

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