Quantitative Risk Management: A Practical Guide to Financial Risk, + Website

3.4 Organizational Structure

It is critically important to address the question of what role and organizational structure are best for risk management and risk measurement. This question is closely tied to corporate governance (and regulatory) issues. I review these issues but do not delve into them in detail. The topic is important and should not be glossed over, but it is outside my particular expertise. Furthermore, there is a substantial literature on corporate governance that readers can access.

Two references are particularly valuable. Crouhy, Galai, and Mark (2001, ch. 3) cover a broad range of issues concerned with risk management in a bank. They start with the importance of defining best practices, in terms of policies, measurement methodologies, and supporting data and infrastructure. They also discuss defining risk management roles and responsibilities, limits, and limit monitoring. Crouhy, Galai, and Mark (2006, ch. 4) focus more on the corporate governance aspect and on defining and devolving authority from the board of directors down through the organization.

I discuss the issues of organizational structure and corporate governance from the perspective of a large publicly traded firm, owned by shareholders whose interests are represented by a board of directors. I assume that the firm has a senior management committee responsible for major strategic decisions. Most or all the discussion that follows could also be translated in an obvious manner to a smaller or privately ...