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

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CHAPTER 3

Concepts and Processes

In this chapter we will examine the key concepts and processes that underpin risk management. We begin by reviewing the major categories of risk faced by most organizations. Next we will discuss the key concepts that should be considered in the assessment and quantification of any risk. Based on these concepts we will review the processes for promoting risk awareness, measuring risk, and controlling risk. We will conclude this chapter with what I consider to be one of the most important ideas in this book, and that is: every risk can be thought of as a bell curve!

Risks come in all shapes and sizes; risk professionals generally recognize seven major types:

1. Strategic risk is the risk that corporate and business strategies (e.g., mergers and acquisitions [M&A]), growth strategies, product innovations) are flawed or ineffectively executed;
2. Business risk is the risk that annual financial and operating results may not meet management and stakeholder expectations;
3. Market risk is the risk that prices and rates will move in a way that has negative consequences for a company;
4. Credit risk is the risk that a customer, counterparty, or supplier will fail to meet its obligations;
5. Liquidity risk is the risk that a company cannot raise cash to meet its requirements in a timely and cost-effective manner;
6. Operational risk is the risk that people, processes, or systems will fail, or that an external event (e.g., earthquake, fire) will negatively ...

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