Implementing Enterprise Risk Management: Case Studies and Best Practices

CHAPTER 32 Constructive Dialogue and ERM Lessons from the Financial Crisis

THOMAS H. STANTON

Fellow, Center for Advanced Governmental Studies at Johns Hopkins University

The financial crisis caused immense harm. Millions of people lost their homes to foreclosure and many more lost employment and, as the stock market dropped, their retirement and investment savings. The financial and economic carnage caused by the crisis has led to increased emphasis on enterprise risk management (ERM), in the sense of identifying and addressing risks that can prevent accomplishment of a company's mission or objectives.

ERM played little role in risk management of financial institutions before and during the financial crisis. In a 2005 report on the state of ERM, Anette Mikes found that “enterprise risk management remains a rather elusive and under-specified concept.”¹ Many large, complex financial firms, such as Citigroup and American International Group (AIG), lacked even an enterprise-wide view of risks, which is a precondition but different from ERM. Parts of those firms continued to build their exposures to subprime mortgages and other risky financial products while other parts tried to shed those risks before the crisis broke.

To understand risk management at large, complex financial firms before the crisis, one must look for critical elements of ERM, but generally not for ERM itself. This chapter focuses on one critical element, constructive dialogue, which includes (1) processes for ...