The ERM Current™

I’m writing today’s post while visiting historic Boston, Massachusetts to review a evolving technology platform for managing Enterprise Risk & Control Programs.  Since I’m in Boston, I thought it would be appropriate to share some insight from an Economist at the Federal Reserve Bank of Boston, Ralph C. Kimball.  Mr. Kimball published his article, “Failures in Risk Management”, in the New England Economic Review back in January 2000.  In his article, he describes in wonderful detail the forces of systemic risk that our economy is struggling with today – a full eight years after his writing. 

As we are experiencing painfully today with the unraveling of financial institutions’ hedging strategies and use of derivatives such as credit default swaps, Mr. Kimball notes,

“While an individual firm may mitigate its risks by purchasing insurance or hedging, these actions do not reduce systemic risk in the economy, but only transfer it elsewhere.” 

This transfer of risk has been accelerated throughout the US and global economies by the fervent use of securitization and leverage.  Individual firms such as Washington Mutual, AIG and Lehman Brothers were acting in their own best interest while spreading the systemic risk contagion.  As Mr. Kimball rightly concludes,

“….the greater the amount of risk mitigation undertaken through hedging or the purchase of insurance, the more likely that unforeseen losses will migrate quickly from one market to another, or from one country to another. That is, while hedging acts to reduce independent risk, it can enhance systemic risk.” 

What the economy is facing today is no surprise.  What is surprising is how long it took the Federal Reserve and others to address the mushrooming systemic risk infecting our economy.  Who knew?  Mr. Kimball knew.

What are your thoughts?  Share your comments below.

In its recently released 2008 Global Fraud Report, The Economist Intelligence Unit and Kroll stated that corporations are reporting an overall 22% increase in fraud in 2008 as compared to a similar survey conducted in 2007.  The report noted that weakened internal controls and high staff turnover were the leading cause of the fraud increase.  The average company in the survey lost more than $8 million due to fraud at some point during the last three years.  Can your company afford these fraud risks and the potential impact on other areas such as public image, reputation and the resulting impact on shareholder return?  Share your thoughts below.  Also, to read more about this compelling report, click here.

As the economy continues to weaken and capital markets are shaken to their core, Enterprise Risk Management (“ERM”) is surfacing as a “must-have” program for not only the largest financial services firms, but also for companies of all sizes.  Just this month, a new report published by The Economist Intelligence Unit underscores the need for solid ERM programs. Read the rest of this entry »

In times like these, the tension in most corporate board rooms is thick, but many board members may not be taking the necessary actions to ensure that they or their fellow members are not unduly exposed.   At the core of the issue is requiring management to establish a solid Enterprise Risk Management (“ERM”) program that surfaces the appropriate issues and holds management accountable for addressing risks in a proactive manner.  

“Now, more boards may take a bigger role in risk management. During a Sept. 9 roundtable held by the National Association of Corporate Directors, 24 chairmen of audit committees agreed “the whole board needed to be engaged” in monitoring risk, an association official says.”  

• Pick directors with temperament, skills and experience to spot warning signs
• Engage in regular scenario planning
• Choose independent law firm as future crisis adviser
• Create an effective risk-management committee
• Appoint a nonexecutive chairman
• Develop and practice an emergency communications system
• Prepare for special committee to explore crisis’s cause and remedies

Board members are realizing that in today’s turburlent climate, a lack of action toward addressing a company’s risks can be more deadly than originally thought.  Just ask the board members at Lehman, they can surely tell you.

Welcome to The ERM Current™ Blog.  This blog is an added feature to the monthly publication of The ERM Current™ dedicated to providing the latest updates and current trends in Enterprise Risk Management & Control.  We welcome your comments and participation in this forum. For more information, please visit www.WheelhouseAdvisors.com.