Risky business.

• Author: Scherzer, Martin H.
• Position: Enterprise risk management

What do you get when you combine strategic planning with risk management? A new way to maximize risk capital.

More and more successful companies share a secret: risk management. And many financial executives charged with managing corporate risks do so using a new paradigm: enterprise risk management.

This system analyzes and manages an enterprise's risks within a consistent, comprehensive framework. It's comprehensive in that a company's diverse risk exposures - operational, hazard, financial and strategic - are considered from an enterprise-wide perspective that also looks at potential interrelationships.

It's consistent in that all risks - regardless of the type or the business unit handling it - are assessed in light of the enterprise's overall risk retention and capital allocation policies. Most important, the enterprise risk management approach yields new insights into the uncertainty a company faces, and new solutions for better utilizing its scarce capital and risk retention capacity to improve financial performance.

Towers of Babel

Traditionally, companies have managed risk by discipline, or "silo." This works when risks can be parsed into distinct areas. But viewing different classes of risk as discrete and unrelated is no longer effective or prudent. And adopting a new vision of enterprise risk management requires overcoming the institutional reality that different views of risk are found at various organizational levels.

Boards of directors and top corporate officers often are most focused on identifying critical events that could blindside the company, and how risk management tools will mitigate them. Controllers and treasurers are often concerned with whether they should retain or transfer risk, and how to do so in the most cost-efficient manner. And while their roles are evolving, traditional risk management executives historically have been most closely involved in the insurance-buying decision and management of operational and hazard risk.

In addition, each risk management silo speaks a different language. To a treasurer, "risk management" most likely means managing the risk exposures of the corporation's assets and liabilities or hedging foreign exchange or commodity price exposures. It means something quite different on the hazard insurance side.

Today, these differences are less pronounced as insurance and financial markets converge and as firms recognize the need for more fully coordinated approaches to risk. Indeed, at a growing number of companies, the "chief risk officer" has assumed this coordinating role and drives enterprise risk management approaches. A chief risk officer, who often has a finance background, is key to ensuring that all risks are evaluated and properly addressed under a consistent analytical framework.

Enterprise risk management fosters the breakdown of outdated silos and provides a mechanism to assume risk prudently, maximize profitability and enhance shareholder value. By accounting for all facets of a company's operations, enterprise risk management can yield innovative risk-financing structures that enable significant cost savings.

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