Chapter 1

Introduction

History is the sum total of the things that could have been avoided.

Konrad Adenauer

Enterprise risk management, or ERM, is generally defined as follows:

The process by which companies identify, measure, manage, and disclose all key risks to increase value to stakeholders.

One of the challenges with ERM lies in understanding what this definition means. There are many interpretations, and some would say misinterpretations, of this short definition. In the next chapter, we will fully and properly define ERM. For now, consider ERM simply as an approach to treat risk holistically in an organization.

Evolution of ERM

ERM has been gaining significant momentum in recent years. We will discuss the following eight most important factors driving this trend, which are as follows:

1. Basel Accords

2. September 11th

3. Corporate accounting fraud

4. Hurricane Katrina

5. Rating agency scrutiny

6. Financial crisis

7. Rare events

8. Long-term trends

The first seven factors involve significant discrete events and are listed in chronological order, while the remaining factor includes trends that have developed gradually over time. Some of the discrete events originate from, or relate primarily to, the financial services sector. However, it is helpful for those in all sectors to understand these events because they are commonly known in ERM circles and their impacts on ERM are felt in all industry sectors. In addition, it is helpful to understand the chronology because the ...

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