Handbook of Finance: Valuation, Financial Modeling, and Quantitative Tools

Chapter 7. Overview of Enterprise Risk Management

JAMES LAM

President, James Lam & Associates, Senior Research Fellow, Beijing University

Abstract: One of the reasons why risk management has received so much ongoing attention is that financial disasters seem to occur on a regular basis to remind us of the perils of "not getting it right." Risk management problems led to the collapse of financial institutions such as Barings and Kidder, and corporations such as Enron and WorldCom. Global financial markets were threatened by the near collapse of the once high-flying Long-Term Capital Management and the resultant losses at leading financial institutions that had to fund a $3.5 billion bailout of the hedge fund. As a result of these wake-up calls and internal risk reviews, leading companies are abandoning their traditional approach of "managing risk by silos," whereby different types of risks are the responsibility of various corporate and business units. Instead, they are adopting an enterprise risk management (ERM) approach. ERM has gained wide acceptance at global companies. The results of a 2005 survey conducted by The Conference Board/Mercer Oliver Wyman indicated that 91% of 271 executives at companies with over US$1 billion in sales were either positively disposed toward or have begun implementing ERM.

Keywords: enterprise risk management, chief risk officer, risk transfer, corporate governance, stakeholder management, line management, risk analytics

A company must develop an effective ...