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

CHAPTER 21

ERM Implementation

Confucius said, “The essence of knowledge is, having it, to use it.” With respect to ERM, it tells us that while careful planning and research is all very well, if we do not act upon this accumulated knowledge, it goes to waste. In this last section of the book, we will discuss implementation requirements that will help firms to translate the concepts that we have discussed in the previous sections into actions.

To share my first experience in implementing enterprise risk management (ERM), I would like to return to the story of my tenure as Chief Risk Officer at GE Capital, which demonstrated to me the veracity of this idiom very tangibly. As the reader might recall from Chapter 4, in 1993, I was hired to be the CRO of GE Capital Markets Services, which was, at the time, going through the start-up phase with aggressive growth and profitability targets. In order to quickly build up the organization, the company had hired a team of traders from a foreign bank, hoping to benefit from their industry contacts and years of experience. As part of GE Capital, with its pristine triple-A credit ratings, it was critical for the new business to establish a comprehensive ERM framework—and for this to happen quickly.

So I hit the ground running. I spent the first few months focusing on the hard side of risk management—setting up risk policies and limits, analytical models, and an integrated system and reporting infrastructure. However, I immediately came up against ...