Corporate manager have been touting their enterprise risk management (ERM) systems for years, but behind the scenes, many risk managers have been echoing the late Rodney Dangerfield, complaining that they "can't get no respect." Now some, like David Andrukonis, the former chief risk officer at troubled Freddie Mac who reportedly warned senior management about risky loans as early as 2004 only to be ignored, are getting to say "I told you so." They may even get some respect.
Judging by a pair of reports on how well ERM systems helped companies and banks avoid the brunt of the financial crisis this year–one by international regulatory agencies and the other by PricewaterhouseCoopers (PWC)–that day may come sooner rather than later.
The two studies agree that having an ERM system can be a lifesaver in troubled times, but only if it gets senior management's respect–and only if it earns that respect by rigorously re-evaluating and monitoring risk exposure.
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"Companies that fared better had assigned a fair degree of status to their risk control organizations. Their risk managers had the status to challenge executive decisions," says Paul Horgan, a partner who heads PWC's global insurance risk and capital team, which produced the industry survey Does ERM Matter?
However, even when the risk organization has stature, if a company doesn't integrate its risk management process down at the business level, it won't work, the study discovered. Companies where ERM has helped to anticipate, or at least better handle, the credit crisis, the oil price surge and the economy's slide into recession were also those that had a consistent self-assessment process that includes some level of key risk-indicator reporting. Just having ERM in place was not enough.
The PWC study offers a further suggestion: Each industry should examine whether more could be accomplished by assessing risk as an industry, through consortium work or trade group think tanks, rather than each company going it alone.
For its part, a study of ERM performance over the past year by the Senior Supervisors Group, a panel of major banking and securities regulatory agencies in the U.S. and Europe, found that firms that had avoided major problems had taken a comprehensive approach to viewing risk exposure, sharing quantitative and qualitative information more effectively across the firm and engaging in more effective dialogue across the management team. Firms with effective ERM systems also tended to have more adaptive risk measurement processes and systems and could rapidly alter underlying assumptions to reflect changing conditions, the international regulators' report notes.
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