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Managing Risk:An Enterprise-wide Approach
Barton·ThomasL1、Shenkir·WilliamG2、Walker·PaulL3 Twenty-first century businesses worldwide operate in an environment where f orces such as globalization,technology,the internet,deregulation,restructurings and changing consummer expectations——are creating much uncertainty and prodigious risks. Consider, for example, that no force is having as great an impact on business today as the Internet. And as the internet evolves, companies in all industries are rethinking the basics: business models, core strategies and target customer bases.
These new developments create new issues related to risk and risk management. Managing risk on an integrated and enterprise-wide basis is a vital issue confronting executives, with the CFO a key decisionmaker in crafting the company strategy, "I think the point to risk management is not to try and operate your business in a risk-free environment, it's to tip the scale to your advantage. So it becomes strategic rather than just defensive," observed Peter Cox, chief financial officer of United Grain Growers Ltd. (of Canada). To some extent, no matter what its products or services, every organization is in the business of risk management.
Most executives would likely agree that risk management is part of their job, and there is probably agreement that risks are increasing rather than decreasing. But ask executives to elaborate on risk management and you'll no doubt get a variety of answers: "It's about preventing disasters," or, "It's something the insurance or finance people handle.
"Is it just business management?
What does "risk management" mean to management in today's companies? Financial Executives Research Foundation recently published a book summarizing research on the subject gleaned from five companies in perse industries. The book Making Enterprise Risk Management
Pay Off, reports on how the five are implementing enterprise-wide risk management. The companies studied were: Chase Manhattan Corp (now j . P. Morgan Chase & Co.), E.Ldu Pont de Nemours and Co.Microsoft Corp., United Grain Growers, Ltd. and Unocal Corp.
One key finding is that risk management is not just about finance insurance or disasters. It's about running the business effectively and understanding, at the core, the fun damental risks facing the business .Tim Ling, president and chief operating officer of Unocal (and the company's former CFO), emphasized, "think you will see almost
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all companies over the next few years moving in the same direction [as we are],really trying to integrate the notion of risk management with the notion of just business management. To me,running a business is all about managing risk."
Successful companies, almost by definition, have managed risks well,but practicing “risk management” has typica lly been informal and implicit. Some companies may have survived without ever knowing their real portfolios of risks. Taking an implicit approach to risk management can be risky itself, as it's caused some major surprises to companies unaware of the explicit risks.Examples include major debacles such as product recalls or fraudulent securities trading, major shifts in markets that management missed or saw too late, and increasingly complex environmental or business changes not recognized by management. Successful risk management today is not just alxsut debacles and the downside –it’s as much about opportunities and the upside. As UGG's Peter Cox .said, it's a "strategic" initiative, not a "defensive" one.
A paradigm shift
By way of definition, enterprisewide risk management, or integrated risk management, is a paradigm shift for many companies. Its goal is to create, protect and enhance shareholder value by managing the uncertainties that could either negatively or positively influence achievementof the organization's objectives. Historically, managing risk was done in 'silos' rather than enter-prise-wide, That is, companies knew how to manage certain obvious risks inpidually but never thought about examining every risk and involving management in managing all of those risks. Typically, companies would have people who managed process risk, safety risk, insurance, financial and assorted other risks. A result of this fragmented approach was that companies would often take huge risks in some areas of the business while over-managing substantially smaller risks in other areas.
Enterprise-wide risk management is a coordinated and focused approach for managing all risks together.
What's driving companies to adopt enterprise-wide approaches to risk management? The study found three major reasons. For starters, risk management has gained recognition as companies have seen major debacles occur internally or at other companies. The size of these disasters can be devastating, and executives frequently lose their jobs as a result.Simply stated, one of the main reasons risk management has become necessary is to manage strategically and avoid catastrophes.
Secondly, many executives believe risks are greater than ever before. In fact, even
