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

CHAPTER 19

Predictions

We began this book by discussing the concepts and processes for risk management and made the case for an integrated enterprise-wide approach. We discussed the general principles of this enterprise risk management (ERM) and then investigated the components of a well-founded ERM framework. Next, we reviewed the applications of ERM in the three key functional areas—credit, market, and operational—as well as specific industry sectors, including financial, energy, and non-financial corporations.

Throughout this book, from the title to the individual chapters, I have emphasized the importance of taking a balanced approach to enterprise risk management. One facet of this is balancing control over the downside (loss minimization) with support for the upside (shareholder value maximization). Another is the need to strike a balance between weighing internal controls over risk (policies, functions, and processes) with external risk transfer mechanisms (derivatives, insurance, and alternative risk transfer).

A final aspect of balance in risk management, and perhaps the one that will prove most critical in moving away from silo risk management toward ERM, is the need to always consider both the yang or hard side of risk management (systems, reports, limits) and the yin or soft side (culture, people, skills, and incentives). In the spirit of yin and yang, we'll take a summary look at the major drivers of change at the human and technological levels: the emergence of risk ...