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Enterprise Risk Management

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Enterprise Risk Management

From Incentives to Controls

Wiley,

15 min read
10 take-aways
Text available

What's inside?

Enterprise Risk Management: uniting market, credit and operational risks.

Editorial Rating

8

Qualities

  • Applicable

Recommendation

Until recently, risk management was fairly simple. You bought insurance for your company or not. Perhaps because the world was a more stable place or because companies simply lacked the tools for quantitative analysis, executives often failed to analyze, understand and manage the spectrum of risks. Those innocent days ended with currency shifts, interest rate turbulence, the emergence of new competitors, the technological revolution and other disruptive events. In the early 1980s, companies began to take risk management seriously. Author James Lam has spent 20 years in risk management, which means he has been involved almost since its inception. He provides a lucid, well-written, well-edited exposition of the new approach to risk management - enterprise risk management or ERM. His book requires a certain basic understanding of mathematical and financial concepts, but it ought to be accessible to anyone with a few years of business education or experience. getAbstract.com believes that CFOs and risk managers will find it most useful.

Summary

Fundamentals of Risk

Risk is uncertainty. It is usually proportional to reward. Low risk propositions usually don't pay much. Plenty of people are willing to take very little risk, and there's no need to pay them lots to do so, so the market doesn't. The greater the risk, the more the market offers to pay those willing to take it. This is a simplification, but not much of one. Generally speaking, there is no reward without risk, and the greater the reward, the greater the risk.

Many companies ran into trouble by ignoring this fundamental fact of financial life. When incredibly good financial returns came their way, they did not look closely to see why the market was paying them so much. Usually, the reason was that they were taking a big risk. Barings Bank, Proctor & Gamble, Kidder Peabody and numerous Japanese brokerage firms came to grief because they accepted big returns and big risks without due diligence.

Companies have a choice — they can choose risk management or crisis management. Failure to manage risk effectively will probably result in a crisis. But everything is a matter of probability. Just as some people win the lottery, some firms may ignore...

About the Author

James Lam is president of James Lam & Associates, an independent risk advisory firm. He was formerly chief risk officer of Fidelity Investments, and is an adjunct professor of finance at Babson College.

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