Enterprise Risk Management: From Incentives to Controls, 2nd Edition

CHAPTER 1

Introduction

One evening in the autumn of 1995, I flew into Boston to have dinner with Denis McCarthy, then the chief financial officer (CFO) of Fidelity Investments. McCarthy was the person to whom I would report if I accepted an offer to become the first chief risk officer for the corporation. I asked him what the main objective would be for this new position. His reply: “We want to operate in an environment in control, not a controlled environment.”

I took that job with the understanding that Fidelity wanted to improve its risk management practices, but not at the price of destroying the entrepreneurial spirit and product innovation that had made it the largest mutual fund company in the United States.

Fidelity was not alone then and is not alone now. Every business faces the parallel challenges of growing earnings and managing risks. A thriving business must identify and meet customer needs with quality services and products; recruit and retain talented people; and correctly make business and investment decisions that will lead to future profit opportunities. However, the pursuit of new profit opportunities means that a business must take on a variety of risks. All of these risks must be effectively measured and managed across the business enterprise.

Otherwise, today's promising business ventures may end up being tomorrow's financial disasters. As I am fond of telling audiences when speaking on the importance of risk management: “Over the longer term, the only alternative ...