Empowered Enterprise Risk Management

CHAPTER 10Risk Strategy

ONE OF THE MOST talked about things in the risk management community is how enterprise risk management (ERM) can become more ‘strategic’. There is a belief, desire even, among many of its proponents that ERM should take place in a strategic setting and contribute towards decision‐making at the top level of the firm. Strategic risk management is in fact frequently touted as the next ‘frontier’ in ERM. To emphasize the message, it is often pointed out that most firms that suffer major declines in their market value do so due to strategic risks, as opposed to operational and financial ones. Despite this fact, the argument continues, it is the latter two that get the most attention by corporations.

Unfortunately, few ERM initiatives today have reached what anyone would call a strategic level. We can exemplify this point using acquisitions, events that are as strategic as they come. They are bold bets by the executive team that they can make money by taking control of an existing firm and doing things in a superior way. Most acquisitions promise a combination of cost‐cutting and revenue synergies, for example, in terms of expanding internationally or broadening the product offering. It is not rare that a firm buys a direct competitor, thereby changing the competitive dynamics of the industry. Not only are acquisitions highly strategic, they are also very risky. Acquisitions are notorious for their high failure rates, often delivering poor results and destroying ...